UK Edition
Questor: good news about Southern – shares in its parent Go-Ahead Group are cheap
As the London stock market continues to break new records, investors who worry that shares are starting to look expensive might find some comfort in a stock whose price is no higher now than in early January 2014, when the FTSE 100 stood at 6,750.
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Capital at risk.
There are good reasons for the poor relative performance of shares in the company concerned, Go-Ahead Group, the rail and bus operator, but they seem to have more to do with sentiment than with financial fundamentals.
It’s not hard to see why some investors will steer clear of the shares. Go-Ahead owns the majority of the Govia rail joint venture, whose franchises include the Southern network. Southern has endured more than a year of disruption – and endless adverse publicity – because of a dispute with unions over changes to the role of guards.
The dispute has coincided with a marked decline in the shares: since a record high of just above £27 in December 2015 they had fallen to £18.13 at last night’s close.
They fell heavily after a poorly received set of half-year results at the end of February and have yet to recover appreciably.
Yet those results demonstrated the value of the business even while progress was hampered by the Southern dispute. The company announced an increase of 6.5pc in the interim dividend and stressed that cash generation and the balance sheet remained robust.
In last year’s annual results, the company had pointed out that the Southern franchise had not contributed to the £57m in operating profits made by the rail division or to the group total of £99m.
David Brown, Go-Ahead’s chief executive, said at the time: “If you’re a Southern commuter you might be upset if I’m making £100m from Southern, but I’m not. At the moment that part of our business is being subsidised by the profit-making parts.” He described the bus operation, not rail, as “core”.
Chris White of Premier Asset Management is one fund manager to regard recent weakness in the share price as a buying opportunity.
Mr White, who runs the Premier Income, Monthly Income and UK Growth funds, first bought shares in Go-Ahead last year following the Brexit vote, saying that they offered a “more secure outlook” than stocks exposed to discretionary consumer spending.
He added to the holding earlier this year after the disappointing half-year results. “While these could have been described as lacklustre rather than a profits warning, the shares reacted negatively,” he said. “We have taken the opportunity to buy more shares and increase our exposure to around 3pc of the [Monthly Income] fund.”
Mr White, who has outperformed his peers over the past 10 years with cumulative returns of 84.4pc against 57.7pc for the sector, according to FE Trustnet, the fund analyst, said: “Go Ahead is a very cash-generative business and the company has the strongest balance sheet of all its peers in the bus and rail sector.
“Bus profits already cover the dividend so we don’t believe it is in danger. The Southern dispute is bound to be settled in the end; we can then hope that the franchise will start to contribute to earnings again.”
- Reader Service: £10 to buy & sell shares free to trade funds with Telegraph Investor.
Capital at risk.
Mr Brown also took advantage of the fall in share price to top up his holding. The Go-Ahead boss bought 2,868 shares at £17.26 a few days after the results to take his holding to 66,007, worth about £1.2m at last night’s close.
At a price to earnings ratio of 8.2 and a 5.6pc prospective yield, Go-Ahead shares look cheap.
Questor says: buy
Ticker: GOG
Share price at close: £18.13
Update: Berendsen
Last month we tipped shares in Berendsen, the laundry services business, at 797p. Following a hostile bid from Elis, a French rival, the shares have climbed by 35.8pc to £10.82.
We based our tip on a purchase of Berendsen shares by the highly regarded Crux European Special Situations fund.
James Milne, the fund’s co-manager, told Questor: “We bought shares mostly under 800p and have now taken most of the profits. Further short-term upside would be limited, as Elis would probably only revise its bid up by a small percentage.
“In the meantime, Berendsen now looks quite fully valued. It is difficult to predict the reaction if the bid fails.”
Questor says: take profits
Ticker: BRSN
Share price at close: £10.82