G4S bullish, but market unconvinced

Given the testing past few months for G4S (GFS) and the wider outsourcing sector, investors might have expected CEO Ashley Almanza to sound more downbeat and cautious than he appeared in today’s annual results.

Instead, the G4S boss was firing on all cylinders and talking up his company’s “substantial confidence” in the next three years, buoyed by a 5% hike in the annual dividend and 4% rise in underlying profits to £496 million in 2017.

Shares, however, continue to reflect wider market uncertainty following the collapse of Carillion and the disappointment over G4S’s November warning in relation to tough trading conditions in the Middle East and India.

Despite Almanza’s upbeat comments and pledge not to repeat today’s miss of his 4-6% annual revenues growth target, there was no respite for shares after some key metrics in the 2017 results came in below City expectations.

The blue-chip company was marked down almost 5% at one stage Thursday, leaving the stock miles short of the 337p peak seen last summer. Caution is clearly the watchword for investors, although recent broker notes from the likes of Credit Suisse and Citigroup suggest G4S should be worth at least 330p.

Source: interactive investor     Past performance is not a guide to future performance

Alamanza used today’s results to highlight the recent transformation of G4S, which employs more than 580,000 people involved in the provision of security guarding, justice services and cash solutions.

Since the turnaround plan started in 2013, he pointed out the group has delivered operating cash flow of £2.5 billion, paid dividends of £700 million and reduced the ratio of net debt to adjusted earnings to 2.4x at the end of 2017.

The strategic focus has been helped by the sale of scores of businesses, whilst it has strengthened controls over major contracts and is improving margins.

Following today’s final dividend of 6.11p, Almanza said the company would now look to increase the pay-out in line with the long-term growth in earnings. It is currently trading with a dividend yielding about 3.7%.

The company is encouraged by the way its secure solutions business is making inroads into the field of systems and technology enabled security, accounting for over £2.45 billion in annualised revenues. It pointed out that the global market for security systems integration is estimated to be around $80 billion by 2021.

All regions apart from the Middle East & India grew in 2017, with North America generating revenues of £2 billion for the first time after 6% year-on-year growth.

UK & Ireland is now G4S’s third-biggest market, falling behind both North America and Europe in terms of revenues, partly as the result of the company reducing its dependency on its home market after a series of blunders.

Revenues in the Middle East & India were 5.1% lower but Alamanza expects trading to begin to stabilise after oil price pressure earlier in 2017.

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