Go-Ahead surges on acquisitions

Go-Ahead Group, the Newcastle-based bus operator, has successfully turned itself into the UK's fifth-biggest operator by a strategy of picking up smaller rivals, investing heavily and applying more stringent management. In the past three years alone, turnover has more than doubled and the shares have moved in almost a straight line from their float price of 120p in May 1994 to yesterday's close of 243p, down 2p.

Yesterday's results show no let-up in the pace of growth. Pre-tax profits almost tripled in the year to 1 July, rising from pounds 2.87m to pounds 8.52m, taking earnings per share up from 8.2p to 21.9p. Acquisitions remain the main driver of expansion. The inclusion of a full 12 months of the previous year's purchases added about pounds 3m to operating profits, almost exactly the contribution from the pounds 20m acquisition of London Central Bus in October 1994. But management has not been sitting on its hands. In the eight months it has been aboard, margins have been raised from 7 to 8.8 per cent.

Go-Ahead has had a lot of catching up to do on margins. It now claims to be ahead of First Bus, the second-largest operator, after raising returns to 10.9 per cent last year. However, although the underlying margin increase of 1.5 per cent is not in doubt, the absolute level was boosted by a move to a straight-line depreciation policy, which flattered profits at the London company to the tune of pounds 2.3m.

With Stagecoach, the market leader, already on 15-per-cent margins, further improvements at the rate of 1.5 per cent a year look achievable. Meanwhile, Go-Ahead seems to be having more than a little local difficulty with the authorities, having been rapped by the Monopolies and Mergers Commission and fallen out with the Department of Trade.

Nonetheless, assuming profits hit pounds 12.5m this year, the shares on a modest forward p/e of 10 look reasonable value.