Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a635693

Smart Investor: G4S is not as bad as you may think

Smart Investor revisits G4S and finds the security firm in surprisingly good shape after the Olympics debacle. But does it deserve a tip?

 
Smart Investor: G4S is not as bad as you may think

The farcical events in the run-up to London 2012, where G4S (GFS.L) was unable to provide the required number of security staff for the Olympic Games, appear to have left a rather bad taste in mouth of officials in Whitehall.

A recent tender for a prison contract saw the company knocked out before the final round and it is not difficult to imagine why. Indeed, the debacle came just over a year after the fiasco involving the company’s takeover of ISS, where it claimed to have shareholder backing before making a sharp u-turn after shareholders complained about the terms of the deal.

So, the past 18 months has not been a smooth ride for G4S and, you could argue, it is surprising to see chief executive Nick Buckles (pictured) remains in his post.

Of course, the company’s track record is impressive, with a net profit being made in each of the past five years. However, whilst 2007 to 2010 saw net profit growth of 14.9%, 2011 was a disappointing year, with net profit slipping from £223 million in 2010 to £181 million. This was at least partly due to the company having spent £55 million on its failed takeover bid as well as another £137 million spent on several successful acquisitions.

Still, return on equity was 12.1% last year and averages 12.9% over the past five years, both of which are acceptable and show that the company is both resilient and reasonably profitable during challenging economic times.

In terms of income, the shares currently yield 3.5% from a payout ratio of 66%. Dividends per share have increased in each of the last five years; rising from 4.96p in 2007 to 8.53p in 2011; an annualised gain of 14.5%. This compares to an average yield in the FTSE 350 of 3.6%, so G4S is at least a contender for income orientated investors.

However, the company continues to carry too much debt. The debt-to-equity ratio stands at 145%; up from 120% in 2010, and affords the company too little headroom when making interest payments, with interest cover of just 3.6. As for an economic moat, the services it offers are likely to be demanded in perpetuity but there remain question marks as to the ease of entry into the markets in which G4S operates, as well as how great the fallout will be from the Olympics fiasco.

With shares priced yesterday at £2.46, G4S trades on a price to earnings* ratio of 18.8 and a price to book ratio of 2.3. Both of these figures are too high, especially when the company’s debt levels and their impact on ROE are taken into account. In other words, ROE should be far, far higher than it is when a company is leveraged to the extent which G4S is.

Overall, G4S is not an attractive investment opportunity. Sure, it offers a resilient track record and an acceptable yield, with dividends having grown at a brisk pace over the years. However, its debt levels, ROE, management strategy, valuation and, perhaps most crucially, its perception among potential clients is sub-standard and not worthy of a place in your portfolio.

last wrote about G4S on 8 July 2011. Since then, shares have delivered a negative total return of -9.6% versus the FTSE 350’s total return of 1.3% over the same period.

*For the P/E ratio I used diluted earnings per share for 2011 from continuing and discontinued operations of 12.9p

1 comment so far. Why not have your say?

Westwinds3

Nov 25, 2012 at 08:17

What struck me about the Olympics debacle was what it implied about the working atmosphere of the company. Staff implementing the policy must have known that a problem was emerging. But they preferred to pray for a miracle rather than tell senior management that things were going wrong. With a miracle, you have a chance to keep your job, admit a problem and you lose it. A company with that ethos may look good on paper, but it is almost certain to blow up again.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Henderson Global Investors: 2014 looks set to be another strong year for UK commercial property


Andrew Friend, acting co-manager*, and Marcus Langlands Pearse, co-manager of the Henderson UK Property Unit Trust (HUKPUT), provide an overview of the key risks and opportunities for the UK commercial property market.

More about this:

Look up the shares

  • G4S PLC (GFS.L)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More from us

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Diary of a Dumb Investor: I'm Russian for returns

by Dumb Investor on Apr 17, 2014 at 15:01

Sorry, this link is not
quite ready yet