Get on board with Go-Ahead

Go-Ahead scored big last year when it won the high-profile Thameslink franchise through its subsidiary company Govia. Govia, which is 65 per cent owned by Go-Ahead, officially took over the Thameslink franchise last September, although it won't be fully up and running until July when it merges with the existing Southern contract. There have been some teething issues, including a flood in a Farringdon rail tunnel which caused a week of delays for London commuters. But management says it's working closely with Network Rail to minimise disruption to passengers while it gets the new line going. Finance director Keith Down says the group "inherited some operational issues" last autumn, but City analysts say a better-than-expected performance from the Southeastern contract will offset any unexpected start-up costs. Crucially, Go Ahead hasn't altered its full-year guidance for the rail division, and the bill for any disruption to Southern services ultimately goes to Network Rail.

Go-Ahead is looking for business outside the UK, too, no doubt inspired by competitors such as National Express (NEX). This foreign foray should not be too costly, with only £1.5m of the group's estimated £9m rail bid costs for this year relating to the overseas ambitions. A small team in Berlin has been set up to look out for opportunities in the German rail market and a bid has been put forward for a bus contract in Singapore. Back on home soil, Go-Ahead is still preparing bids for the Northern and TransPenine Express franchises, for which it has already been shortlisted. It's also planning bids for a number of other UK contracts, which are due over the next two years.

What Go-Ahead will do with the rest of its surplus cash has become a subject for debate. Some analysts believe there's increasing scope for the group to start making generous shareholder returns. At the half-year results in late February, the interim dividend rose 4 per cent to 26.6p a share. But analysts at Liberum estimate that, if the group hits its target of £100m bus operating profit in June 2016 and Thameslink lives up to expectations, Go-Ahead could return £77m, or 179p a share this year. This would equate to a yield worth roughly 7 per cent, based on the current share price. The board has set a target of keeping net debt (excluding £423m of cash restricted for rail operations) at between 2.5 and 1.5 times cash profits. But given the underlying cash generation, analysts think the group could fall below that range as soon as the end of the current financial year. Using the surplus cash to fund acquisitions is considered unlikely at this stage, and the group only has "modest" capital commitments in the near term. On that basis, greater shareholder returns look feasible.

Following the Thameslink success, a lot of investors' recent focus has been on rail, but Go-Ahead's bus business should not be ignored. Admittedly, there's more regulatory risk here: George Osborne has confirmed government plans to devolve more power to regional councils over bus re-regulation. Go-Ahead is the largest bus operator in Tyne & Wear, which also happens to be the largest region considering such re-regulation. However, Go-Ahead doesn't run bus services across the majority of cities considering re-regulation, which means it doesn't have that much to lose in the long run. In fact, a new contract-based system (similar to the London model) could provide new entrants with an attractive route to market, which on balance could give Go-Ahead a chance to grow its market share.