Go-Ahead - it's a low-risk play

 

BRITONS make about 4.4bn journeys each year by bus. It is not the most glamorous of industries, but neither is it one of the most risky.

Go-Ahead Group, headed by chief executive Chris Moyes, is one of the handful of large transport operators to emerge since the Seventies, exploiting the liberalisation of the UK bus and train market.

It runs buses in London, Oxford, Brighton, across large parts of southern England and in the North-East. And it is the company behind the Thameslink and Southern train services bringing commuters into London. Go-Ahead also provides services at a number of British airports.

In all, it reckons to have almost 6% of the UK public transport market. Shares in the company have had a strong run, helped by it winning the franchise to run commuter train services in Kent from this spring.

 

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And with the shares now at 1666p, they appear pretty expensive for a company operating in a low-growth industry and with likely earnings per share of about 115p for the 12 months to June. Earnings for 2006-07 could nudge 130p.

But Go-Ahead is attractive because it has a modern fleet of buses, which means capital spending can be kept in check for the next few years. And more particularly, the company has far smaller debts in proportion to its size than its rivals.

This is the key to the investment case for buying shares in Go-Ahead. The company generates cash. It has already said it will increase dividends sharply, so shareholders will receive half of net earnings.

But there is huge scope for a far more aggressive campaign of share buybacks than it has been prepared to countenance so far.

One calculation suggests that Go-Ahead could afford to buy back a third of its equity. That could lift earnings per share by as much as 50%.

Midas verdict: Go-Ahead's reliable cashflow should provide comfort for any risk-averse investor. If the company were to take a bold stance and buy back stock aggressively, the shares would look extremely attractive. A private equity investor might even bid for the company. Buy.

 
 

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