Questor share tip: G4S looks abroad for its future

Questor share tip: G4S looks abroad for its future

G4S is a hold, but buy on any falls for its international growth

By Garry White

7:00AM GMT 12 Feb 2013

G4S
280.4p+0.1
Questor says HOLD

G4S

Security group G4S can now draw a line under its embarrassing Olympic staffing debacle after it reached a settlement with the London Olympic Committee. However, the company’s future lies far from the UK.

The £88m total cost of its failure to provide enough staff last summer is ahead of the provision raised in G4S’s books of £50m. However, this draws a line under the incident and the company can focus on more productive matters.

The breakdown of the charges incurred by G4S includes £70m on the contract, £11m in charitable donations and external fees, and a further £7m relating to sponsorship and marketing costs.

The settlement is also lower than the worst-case scenario. MPs including Keith Vaz had called for the entire £57m management fee G4S charged to be refunded, but this has not come to pass. So, all in all, investors can regard yesterday’s news as a small positive.

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The flamboyant Nick Buckles, G4S chief executive, should take one important lesson from the debacle: it’s better to under-promise and over-deliver than over-promise and fail to meet expectations. Other chief executives should take note.

In its last financial year, G4S’s revenue from the UK government was about 10pc of the total. While still significant, the proportion of business from Westminster has been falling – and will continue to do so. Indeed, this year analysts are pencilling in 8pc of revenues for the UK, but 12pc of operating profit.

G4S has operations in 125 countries and an 8pc share of the global market in security services, making it the industry leader. Indeed, the company employs more people than any business in the FTSE 100.

Investors were reassured by comments from the Ministry of Justice last month that the Olympic fiasco would not play a role in future contract decisions. In November last year, G4S missed out on winning contracts to run UK prisons, but the government department responsible said that the quality and price of bids were the most important factors. In fact, it sounded like pricing competition was intense, and was the key reason why G4S was not successful. However, it would be helpful if the company could win some more public sector business to provide some reassurance on this.

The group recently had another setback in the UK, as a potential outsourcing deal with three police forces collapsed. The Bedfordshire, Cambridgeshire and Hertfordshire forces were in discussion with G4S on the provision of joint IT and human resources services. However, their recently elected police and crime commissioners (PCCs) rejected the plans.

The future for G4S, however, is in emerging markets. In 2011, 30pc of revenues came from these countries, with 31pc expected in 2013. Also, the global security market is highly fragmented and G4S is in an ideal position to act as a consolidator.

G4S shares are trading on a December 2013 earnings multiple of 12.4, falling to 11.1 nest year. The prospective yield is 3.1pc, rising to 3.4pc.

Questor has had a hold rating on the shares for some time, maintaining it after the shares plunged over the summer because of the uncertainty over its Olympic liabilities. The shares have rallied sharply since, so a hold stance is maintained. However, any pull-back would create a buying opportunity.

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