Blue-chip security firm G4S delivers record results.
G4S (LSE: GFS), formerly Group 4 Securicor, released full-year results on Tuesday. Record numbers were broadly in-line with analyst expectations.
Turnover smashed through the £7bn barrier, up over 18% on last year's £5.9bn. Favourable exchanges rates helped, but even on a constant currency basis growth was a recession-busting 7.4%.
Organic turnover growth, which was 4.8% at the halfway stage and 4.2% at nine months, slowed again in the final quarter pulling the full-year number down to 3.7%. Low inflation limited the company's ability to increase prices and it expects a similar subdued level of organic growth in 2010 -- that, and profit taking after a strong recent run in the share price, was probably the reason it was marked down 3% to 270p.
However, positive exchange rates, as well as some margin improvement through cost control and improved business mix, did wonders for earnings, bottom-line profit coming in at £219m, up from £165m last year.
Earnings were backed by solid cash generation, with cash conversion at an above-target 90%. Net debt at £1.4bn was marginally up on last year, but the company has no significant maturities until 2012.
Rise of a global leader
G4S offers a wide range of security services, including risk consultancy, facilities management, event security, landmine clearance and the secure transportation and storage of cash. The G4S brand identity was rolled out worldwide in 2006, two years after a merger between Group 4 and Securicor.
Group 4 is probably still remembered as the operator of the first privatised prison in the UK and for an embarrassing series of security blunders, including escaped prisoners, in the early 1990s, which invited comparisons with the Keystone Cops and made the company the butt of many a joke for some years after.
But those days are long gone. It surely says something about our twenty-first century world that today G4S is not only a FTSE 100 company, but, with more than 595,000 employees, the largest employer on the London Stock Exchange and the second-largest private employer in the world behind Wal-Mart. It has operations in more than 110 countries, across six continents.
The man in the driving seat
Chief Executive Nick Buckles has overseen the impressive growth of the company in recent years. He joined Securicor in 1985 as a projects accountant and worked his way up through the ranks to become chief executive in 2002, succeeding to the top job in the enlarged Group 4 Securicor in 2005.
In terms of his age -- he's not yet 50 -- and his quarter-of-a-century service to one company, Buckles isn't exactly typical of the modern top-flight career executive. His family and educational background is also somewhat atypical: from a respectable working-class family, he attended a secondary modern school followed by a polytechnic college.
G4S has followed a relentless acquisition strategy, devouring dozens of small and medium-sized businesses. But while Buckles is seen by some as a bit of a wheeler-dealer, a closer look at his acquisition strategy shows it to be disciplined and firmly focused on adding new capability to drive future organic growth.
Whether due to Buckles's humble background, his aggressive acquisition strategy, an enduring memory of Group 4's Keystone Cops days, or some other reason, there are those in the City who apparently remain convinced that G4S is going to mess up. To me that looks like irrational prejudice.
Continuing growth on the cards
The market is concerned that some companies in the Support Services sector will suffer when the UK government inevitably reduces public spending. However, education, transport and housing, which are seen as vulnerable, don't really impact on G4S, while the possibility of increased defence outsourcing is a positive.
G4S's global reach also represents a big plus. Around two-thirds of the company's earnings are in US dollars and Euros; while more than a quarter of its turnover is generated in emerging markets. The group is number one or two in most of the developing countries in which it operates and growth is strong, currently led by the Middle East.
With many of G4S's contracts inflation-linked, and foreign currency exposure a distinct advantage while the pound is weak, there appears to be little risk of earnings shocks to the downside for the foreseeable future. At the same time the company has headroom for further earnings-enhancing acquisitions.
Valuation
| Company | Primary listing | Forward P/E |
|---|
| Brink's | New York | 16.8 |
| Securitas | Stockholm | 13.8 |
| Garda World Security | Toronto | 13.7 |
| G4S | London | 13.0 |
| Loomis | Stockholm | 11.4 |
On a forward price-to-earnings ratio of 13, based on a conservative 2010 earnings-per-share forecast of 21p, G4S looks reasonable value against its international security sector peers, particularly as its adeptness at making bolt-on acquisitions and its generally superior exposure to higher growth emerging markets give it good potential for earnings upgrades.
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The author owns shares in G4S.
