Quick Thoughts on Go-Ahead (GOG LN)

The Go-Ahead Group PLC (GOG LN) is a UK-based public passenger transport company for bus and rail services. 

The group operates through three segments: regional bus, London bus and rail. 

The regional bus segment comprises commercial bus businesses outside of London. 

The London bus segment comprises tendered bus operations under control of Transport for London (TfL). 

Train operation are run through rail franchises through contracts tendered by the Department for Transport (DfT).

Outside of the UK, the Group mobilizing three rail contracts in Germany and also run bus services in Singapore.

I found the stock price of GOG LN lying helpless when I first found it in early September 2017.

Shadowed by the fear of Brexit effects and the number of downgrades made by analysts make GOG LN stocks slumped.

After "technical washout" (see circle), I tried to dig deeper about this company.

After reading the financial statements in passing, it seems the condition of this company is fine.

Here are the financial data based on book year 1H17:

		2017	2016	2015	2014	2013
Mcap	702.94
Cash	590.00
Total debt	359.00
EV	471.94
Equity	202.00
Revenue		3,481.00	3,361.00	3,215.00	2,702.00	2,572.00
Operating income		151.00	163.00	97.00	110.00	80.00
Depreciation		(69.00)	(58.00)	(80.00)	(67.00)	(65.00)
EBITDA		220.00	221.00	177.00	177.00	145.00
Net income		89.00	94.00	52.00	70.00	46.00
Operating cash flow		144.00	212.00	411.00	172.00	115.00
Capex		(147.00)	(115.00)	(48.00)	(71.00)	(60.00)
FCF		(3.00)	97.00	363.00	101.00	55.00
Net debt/EBITDA		(1.05)
PBV		3.47
P/E		7.90
EV/EBITDA		2.15

Although not growing fast, but the company's income grew very-stable (genius?) in the last five years.

It is true company’s incomes appear to be fluctuating, but its cash profit is still growing steadily. Free Cash Flow (FCF) also looks healthy.

All looks good. Sign me up!

But, wait, then why the stock prices fall?

According to media, the company has been hit repeatedly by strikes on its Southern rail franchise. This is one of the many railway lines owned by GOG LN, that is Govia Thameslink Railway (GTR) – a joint venture between GOG LN and France’s Keolis. This franchise started in Sep14 and is the largest contributor to company’s revenue (35% total revenue). This is the only business segment that has decreased revenue in 2017, ie about -4% y-y. On July 13, 2017, agreement was reached with the DfT regarding GTR contractual variations relating to the impact of industrial action on train performance over a period of around 18 months. In that agreement, GTR will fund a package of performance and passenger improvements worth GBP 13.4 mio. This agreement resolves financial uncertainty relating to past industrial action and allows GTR to focus on improving services.

In addition, it seems the market is also concerned about the impact of Brexit, which will manifest in the form of weakening economy and rising labor costs.

The slightly shrinking revenues, coupled with the potential increase in operating costs, send GOG LN stock prices falling into the abyss.

But, hey, regardless of any problems that will be faced, the price of shares of GOG LN has dropped 27.33% in a year. Whereas in the same period, the FTSE All Share Index rose 12.02%.

In addition, the decline in the price of shares of GOG LN also caused stock valuations to be very attractive:

	GOG LN 2017	5Y historical	Peers
P/E	7.90	13.74	15.04
PBV	3.47	16.51	5.77
EV/EBITDA	2.15	4.88	4.40
ROE	44.00%	133.47%	34.10%

*Source: Bloomberg

From the table above can be seen, that the valuation of shares of GOG LN relatively very cheap when compared with its historical valuation and even with its competitors.

In my view, there are 3 things that make GOG LN interesting:

1. The problem facing GOG LN is a problem that can be solved. Even in today's tough times, the company's revenue keeps growing.
2. The company's balance sheet looks pretty strong against the storm.
3. GOG LN share price is relatively cheap compared to its historical valuation and even compared to its competitors.

At current prices (GBp 1,630), GOG LN not only offers attractive valuations, but also provides attractive dividend yield. In my calculations, GOG LN can give dividend yield of 5% p.a.

I think it is not excessive to expect GOG LN valuations to reach 4x EV/EBITDA, a level that is both a historical achievement and a competitor's valuation level. Fingers crossed.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

PNIN IJ and EMH

Once, there are 2 people walking together.

One is a value investor (we call it VI). While the other is a professor of finance (Prof).

As they both walked through the park, suddenly VI's eyes saw a $ 100 bill lying on the sidewalk.

VI: Professor, look! There’s $ 100 cash there!

Prof: That is impossible. You must be mistaken.

VI: Why is that? It really looked like $ 100 in my eyes.

Prof: If there were really $ 100 there, it must have long been taken by others.

VI walked over to the money, picked it up and put it in his pocket.

VI: It's really $ 100, professor. Let me treat you a cup of coffee?

Prof: No, thank you. I still have to catch the time to teach on campus.

VI: Oh ok. Sorry professor, remind me again, what subject do you teach on campus?

Prof: It is an “Efficient Market Hypothesis” (EMH) theory.

About a year ago, I recommended the shares of PT Paninvest Tbk. (PNIN IJ) to my team. 

One of my main reasons for recommending PNIN IJ is because its valuation is so cheap.

At that time, PNIN IJ was only traded in the range of 0.2x BV and 5x E. A very cheap price level.

As well as the $ 100 money lying in the park, shares PNIN IJ long enough to sit at the level of IDR 600.

My feelings for the shares of PNIN IJ, identical to the feeling of value investor in the fictional story above.

But many of my friends do not care about my recommendations.

Some of the classic reasons are:

1. The stock is not liquid.
2. Panin's group shares are value traps (concern on GCG).
3. No catalyst.

People rarely aware that there is no a truly perfect investment.

If PNIN IJ is liquid, GCG is good and has a catalyst, do you still think PNIN IJ will be trading at 0.2x BV?

Have you ever thought, that all the bad things, actually been reflected in the stock price valuation?

With a 0.2x BV valuation, PNIN IJ's shares traded well below its liquidity value. And most of PNIN IJ's assets are liquid assets, which do not require big discount to know its real market value.

Indeed, most of its assets are paper assets (stocks), whose value can fluctuate and can very quickly generate profits, but also losses.

But in fact, historically, PNIN IJ is able to generate a stable yet substantial profit.

And when it comes to the stability of assets and profits, isn’t the instability, also experienced by commodities companies? But the fact is that commodity stocks can become liquid and fly when the time comes. Clearly there has been massive discrimination against PNIN IJ shares.

Suddenly in the past few days, PNIN IJ's shares have risen remarkably to IDR 1,415/share, with very high trading volume (liquid).

A 135% profit in a year.
At IDR 1,415/share, I am more than happy to take money off the table.

That's why I'm not too worried about the growing trend of passive investment (index fund) and or artificial intelligence (AI/robotic investing).

Ultimately, all judgments and final decisions, leads to humans.

And man is subjective.

Therefore I am pretty sure, in the future that will come, the market will still create opportunities like the $ 100 money lying on the ground.

In fact, with the increasingly widespread passive investment (index funds), the more inefficient a stock market.

In the long run, the stock market is always right, but that does not mean it is always fully efficient in its journey.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.