G4S struggles after earnings blow

by from interactive investor |

G4S shares have endured another tough session, despite optimism the security services company can deliver on full-year targets. Graeme Evans reports.

As hard as G4S boss Ashley Almanza tries, convincing investors to share his vision and "substantial confidence" in the security and cash services firm's medium-term outlook is proving a challenging task.

With outsourcing sector jitters still very much evident, today's half-year results triggered a fresh 7% share price decline to leave the FTSE 100 group back where it started the year.

The slump reflects a couple of slight misses in the interim figures, with organic revenues growth of 0.2% coming in just below the 0.3% forecast and adjusted earnings of £212 million about 2% below consensus at £217 million.

G4S reiterated its full-year outlook and expects better revenues momentum in the second half. That's supported by a "step change" in organic revenues growth for the second quarter, rising to 3% from the minus 2% in the previous quarter.

The Middle East has been a problem region for the company in the past year but there are signs that the pressure will ease in the second half.

Caution is clearly still the watchword for investors, even though analysts at UBS think there's a potential 16% upside in the price to 305p. That's based on a projected price earnings multiple of 15x and a dividend yield of 3.5%.

Today the interim dividend was pegged at 3.59p a share. Almanza has previously pledged to increase the pay-out in line with long-term growth in earnings.

With the net debt to earnings ratio expected to finish the year below 2.5%,  Almanza added:

"Priorities for excess cash will be investment, dividends and, in the near term, further leverage reduction."

As part of a turnaround plan started in 2013, G4S's strategic focus has involved the sale of scores of businesses, alongside stronger controls over major contracts.

The priority now for the company is to improve margins in its secure solutions business, which accounts for 77% of group revenues through services including manned security, facilities management and prison guarding.

The margin remained at a narrow 5.9% in the first half of the year, which reflects the impact of productivity and service gains offset by wage inflation. The company hopes that developing technology-enabled security services will be key to growing customer relationships and earning higher margins.

In the cash solutions business, the margin narrowed to 10.7% from 11%. Cash volumes are declining in developed countries but still growing in emerging ones.

G4S is also targeting banks and retailers with new products and services, with Almanza hopeful the cash technology business can deliver profits greater than the profits of the traditional cash business in the medium term.

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