Investment Column: Go ahead and hold Go-Ahead for the divvy

McBride; Abbey Protection
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The Independent Online

Our view: Hold

Share price: 1165p (+77p)

Go-Ahead Group, the bus and train operator, produced a set of full-year results ahead of City forecasts yesterday that showed that many of its cogs are turning rapidly.

The company increased passenger revenue in all its bus and rail operating companies, which include Govia, the UK joint venture rail business it runs with France's Keolis, and a fleet of 3,800 buses serving areas from Oxford to the north-west of England. For the first time, the company achieved more than a billion passenger journeys.

Although pre-tax profit fell by 24.4 per cent to £88.7m for the year to 3 July, this was better than the City had expected, and net debt fell to just £88.3m. Go-Ahead, which also has a joint venture in the US running yellow school buses, maintained its dividend at 81p, giving it a yield of 7.4 per cent. The company is well placed to benefit from consolidation in the deregulated bus market and said it welcomed the July review of rail franchising unveiled by the Government.

The road ahead could contain a few potholes, however. For instance, the company's operations rely heavily on commuters in the south-east of England, who could be hit by a renewed slowdown in the economy.

Go-Ahead said it expects lower fuel costs and a small contribution from acquisitions, but these will be "partly offset" by the full-year effect of lower operating profit margins in London.

In addition, the company forecasts a "small reduction" in operating profit margin at its rail division next year. Given the uncertainty over the UK economy's recovery, Go-Ahead said the outlook for the coming year remains tricky to predict, not least because of what is likely to be a grisly public sector spending review in October. Thanks to a surge in the shares yesterday, Go-Ahead now trades on a multiple of 10.5 times 2011 forecast earnings. That's probably about fair value, but we'd advise holding for the yield if nothing else.


Our view: Hold

Share price: 160p (+19p)

McBride, Europe's biggest maker of retailers' own-brand household cleaning and personal care products, hit a bit of a sticky patch in the summer.

The group's shares tumbled in June when it revealed underlying revenues had fallen in the fourth quarter, adding that it faced "significant risks" that costs would rise over the next year.

The shares tanked 36 per cent to a year low of 114p following the news, from a peak of 246p just months before. Yet, things may now be looking more positive for the company, whose clients include Tesco and Asda.

McBride released its full-year results yesterday, and they were in line with expectations as revenues rose 2 per cent to £812.2m and operating profit rose 38 per cent to £50m. Yet it wasn't the numbers that analysts and investors were looking out for, but the outlook. Chris Bull, the chief executive, said the group is "better placed than previously" to manage raw material cost inflation.

McBride also announced it had reduced its net debt from £82.4m at the end of 2009 to £22.4m last year and had taken 70 per cent of a Czech-based skin care business. Panmure Gordon, which put the stock on a rating of 10.8 times 2011 forecast earnings, believes McBride can make up the lost ground. We are more cautious in the short term but we'd still hold the shares.

Abbey Protection

Our view: Buy

Share price: 81.25p (unchanged)

There are only two certainties in business life: legal fees and taxes. So a company that helps ease the pain when these twin demons strike is a compelling investment case. Abbey Protection, where interim pre-tax profits were up 11 per cent to £4.7m yesterday, sells insurance against legal and professional services fees incurred by small and medium-sized business. The results showed more businesses are signing up for its services and there are convincing arguments to suggest this will continue.

Despite some consolidation in the legal and professional services industries, fees remain cripplingly high for small businesses caught at the wrong end of a lawsuit or regulatory investigation. And the risk that a company will face such action continues to increase. HM Revenue & Customs, the Office of Fair Trading and the Health and Safety Executive are just three of several regulators with sharp claws. Many of their investigations fall away but the cost of putting up even a basic defence can wipe out small firms with tight cash flows.

Then there's the threat of private litigation. In this environment we believe businesses will take the hit now by buying insurance to avoid a potential nightmare in the future. Buy.