Shares of Go-Ahead Group (LSE: GOG) rose by 14% in early trade on Thursday, after the firm surprised investors with a strong set of half-year results.
Shares in the bus and rail operator are still worth 35% less than they were one year ago, but these half-year results suggest that the company may have turned the corner. Today I’ll explain why I believe Go-Ahead could be a great recovery buy for income investors.
But before that, I’m going to take a look at another out-of-favour FTSE 250 stock with a tempting 7.5% yield.
A fine pedigree
Pub chain and brewer Marston’s (LSE: MARS) took a bold step when it acquired rival Charles Wells in 2017. But the deal seems to have worked out well so far. Charles Wells brewing portfolio has added names such as Courage and Bombardier to Marston’s brands like Pedigree and Hobgoblin.
Acquiring the smaller firm’s pub estate has also increased Marston’s presence in London and the South East, two important markets.
Like other pub groups, this firm has already endured a difficult few years of reshaping and updating its pub estate. This process is now starting to deliver results, with growth in sales and underlying earnings during the 16 weeks to 20 January.
Like-for-like sales rose by 2.6% in Taverns and by 1.1% at Destination and Premium locations, excluding the impact of two snowy weeks during the period.
What could go wrong?
One headwind at the moment is the restaurant sector, which is struggling with overcapacity and discounting heavily. If consumer spending weakens, pubs could be forced to cut their own prices in order to attract customers.
As things stand, Marston’s earnings are expected to remain flat at 14.2p per share this year. A dividend of 7.7p per share is expected by brokers, giving a forecast P/E of 7.2 and a prospective yield of 7.5%. These shares are on my watch list.
A ticket to ride
Public transport is one of several stock market sectors suffering from political uncertainty at the moment. Personally, I don’t think investors need to worry about rail renationalisation, as I explained recently.
However, falling profits are a potential concern. Luckily the half-year figures from Go-Ahead suggest to me that it’s now on the right track.
Revenue rose by 6.6% to £1,829.4m during the six months to 30 December, while pre-tax profit rose by 19% to £79.7m. Earnings per share rose by 7.3% to 115.5p, providing good cover for an unchanged interim dividend of 30.2p per share.
The group’s cash generation also improved. Free cash flow turned positive and rose to £94.6m, enabling the firm to reduce adjusted net debt by 32% to £254m. This leaves borrowings at just 1.03 times earnings before interest, tax, depreciation and amortisation (EBITDA) — a very comfortable level.
However, you might want to note that despite this strong cash performance, the dividend has been left unchanged. This might be because today’s results were boosted by a one-off sale of surplus assets following the loss of the London Midland rail franchise.
Analysts are still forecasting a 5% fall in profit next year. But despite this risk, I believe Go-Ahead shares offer good value at current levels. After today’s gains, the stock trades on a forecast P/E of 8.5 with a yield of 6.7%. I’d rate this as a buy for income.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.