The market reacted favourably to a decision by Kelsian (ASX: KLS) - formerly Sealink Travel - to bail on the potential acquisition of UK bus and rail market operator Go-Ahead, with the public transport service provider’s share price up 15% an hour out from the open.
Management has decided not to proceed with an offer for Go-Ahead due to volatile and external events that have adversely impacted the Kelsian share price since 14 June 2022 when a possible offer for the UK-based company was first tabled.
Market reaction to the announcement was unambiguously negative with the share price tumbling 20% to a two year low of $5.47 yesterday.
Despite flagging the long-term strategic and economic rationale of the potential transaction, the Kelsian board considered the timing, in light of Australian equity market conditions, to be far from ideal.
However, under UK rules, Kelsian reserves the right to make an offer within six months if the rival $1.5bn offer by Gerrard Investment Bidco – comprising Australia’s Kinetic and Spain’s Globalvia Inversiones - for Go-Ahead is withdrawn or lapses, or if another party steps in with an offer.
Go-Ahead would by no means be the Kelsian’s first foray into the UK, with the company having entered a joint venture last September combining the company’s Tower Transit Westbourne Park public bus operations in London with RATP Dev UK’s London United and London Sovereign operations.
The recent sale of the East London Bus Operations to Stagecoach for GBP20m, completes the restructuring of the company’s London operations.
To the uninitiated, the S&P/ASX300 company operates around 4,000 buses, 120 ferries and 24 light rail vehicles, and according to Kelsian carries over 207m customers.
Due to the impacts of covid restrictions, Kelsian recorded a statutory net profit after tax (NPAT) of $21.2m for the December 2021 half-year compared to NPAT of $32.0m in the previous period and declared a 7.0 cents per share fully franked interim dividend.
At the half year, management reiterated its commitment to building a diverse geographic portfolio of contracted essential services and flagged a strong pipeline of organic growth opportunities with a high level of tendering activity in Australia.
Consensus on Kelsian is Strong buy.
Based on Morningstar’s fair value of $7.61 the stock appears to be undervalued.
Based on the three brokers that cover Kelsian (as reported in by FN Arena) the stock is currently trading with 42.9% upside to the target of $8.86.
While Macquarie, UBS and Ord Minnett all have Buy ratings on the stock, coverage is looking a little dated, and investors should look out for updates following today’s announcement.
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