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Should I Buy G4S Plc?

Nobody in their right mind would buy G4S (LSE: GFS). Or would they?

Olympic loser

G4S is the FTSE 100 company the British public loves to hate (and ridicule, lampoon and despise). It was the biggest loser in last year’s London Olympics, following its embarrassing security recruitment debacle. It is politically toxic, having paid no tax in 2012, despite working on hugely lucrative government contracts. Chief executive Ashley Almanza was up before the Public Accounts Committee last month, as part of a £24 million electronic tagging scandal. Given public antipathy, you could say G4S is the ultimate contrarian stock. And yet…

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G4S has been a lousy investment, up just 30% in the past five years, and 4% over the past year. That compares to 60% and 11% growth on the FTSE 100 as a whole. Its recent interim statement disappointed the market, despite organic growth of 4.8%, rising to 14% in emerging markets (where it now earns 40% of its profits). Investors were concerned that the newly announced investment of up to £20 million in customer service would prove a drag on future earnings. There were also disappointed by the lack of new business disposals. Troubles in Europe and lower US spending on security are also a worry. The company’s recent aggressive acquisition strategy has racked up huge debts.

A more secure future?

Despite that, G4S has a great opportunity to put things right. Analysts Freedonia forecast the global security market will grow 7.3% to $244 billion by 2016, notably in emerging markets, where G4S is strong. That’s a juicy target to aim at, given that total G4S revenues in 2012 were just $11 billion. G4S may face reputational problems at home, but its reputation is higher abroad. China, India, Russia and South Africa should all deliver double-digit growth.

This could make G4S an exciting proposition, providing it survives the massive reputational damage if found guilty of inventing criminals then charging the taxpayer to tag them. Politicians may be forced to take tough action, especially with an election looming. Given its £1.8 billion debt pile, and a seemingly endless supply of, G4S is risky. But earnings per share are forecast to hit 7% in 2014, after a 20% drop this year, and you can buy it at 12.3 times earnings. The 3.4% yield will offer you some reward, while you’re waiting for G4S to profit from the emerging global security market. But it certainly isn’t a secure investment.

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> Harvey doesn't own any shares in G4S.

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