If you have £2,000 to invest, then I highly recommend taking a look at security services business G4S (LSE: GFS). This business might look like an ugly duckling on the surface, but it is well-positioned to capitalise on the growing demand for security services around the world.
There’s no denying G4S has had a rough time over the past few years. Beset by scandals and poorly performing operations, the company has struggled to grow profits. However, management hasn’t been inactive.
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CEO Ashley Almanza has been spearheading the company’s efforts to diversify into new lines of business, and improve efficiency at legacy operations.
These efforts finally seem to be paying off. During the first six months of 2019, underlying revenue increased by 4.6% across the group, in line with the medium-term revenue goal of 4% to 6% per annum.
Business transformation
Historically, G4S has been a business that has relied on low-paid workers to provide security solutions. But now the group is increasingly moving towards technology, where there’s tremendous scope for growth.
Revenues at the group’s technology-enabled Secure Solutions business increased by 14% across the globe during the first six months of 2019, while North American cash technology revenues grew by 33%. This impressive growth helped the firm post an adjusted profit before interest tax and amortisation of £234m for the first half, above analyst expectations.
And as part of management’s shift towards technology, G4S is now planning to separate its Cash Solutions business from the rest of the enterprise. The spin-off or demerger is expected to take place in the first half of 2020, and management is considering all options for the business, including a sale.
Fatter profits
The divestment is part of management’s plan to turn G4S into a business focused on security and security technology. Technology-enabled solutions accounted for 46% of group revenue at the end of June, compared to 42% of the end of 2018. By divesting the cash business, this weighting should shift further towards technology.
G4S’s shift towards technology is the reason why I believe that this stock could make an excellent investment has current levels. In the past, the group has been hamstrung by its low margin, low growth security operations. As a result, the market has never placed a high valuation on the stock. The security technology business, by comparison, offers better growth and fatter profit margins, which could lead to a re-rating of the shares.
Double your money
At the time of writing, the stock is trading at a forward P/E of just 9.8, compared to the Professional Services Industry average of 12.1. Cybersecurity businesses can command P/E multiples of 20 or more. On top of the low valuation, shares in the security business also support a dividend yield of 5.4%. As the payout is covered 1.9x by earnings per share, it looks safe for the time being, and there’s headroom for payout growth as the business continues its transition.
So that’s why I would buy shares in G4S today. As the company continues to realise its operations for the 21st century, I think there is a good chance the stock could jump by between 20% to 100% from current levels.
