Buy into G4S's recovery

In fact, G4S's third quarter trading update this month revealed that organic revenue in the nine months to end-September had risen by a respectable 4.2 per cent year-on-year. That was despite revenue declines of 1 per cent in the UK and European businesses. The group also won £1.7bn-worth of new contracts, while G4S's contract retention rate reached 90 per cent. Moreover, the emerging market operations - in such regions as Africa, Latin America and Asia - are growing fast. Those businesses now generate almost a third of group sales and organic revenue growth there jumped to an impressive 11 per cent in the nine months to end-September. North America, meanwhile, saw revenues rise 6 per cent. In April G4S was even allowed to again bid for UK government work.

This sits in sharp contrast to developments at Serco (SRP). It too is a big player in the security arena and - like G4S - was hit hard from the reputational fall-out from the prisoner-tagging scandal. But unlike G4S, Serco appears to have barely begun clearing up the mess. Indeed, its shares slumped over 30 per cent earlier this month after revealing the need to tackle its debt burden with a £550m rights issue. Serco also identified a painful £1.5bn of contract provisions, while revenue slumped in the second half, too.

While Serco continues with its strategy review - G4S's chief executive Ashley Almanza appears well advanced with the heavy lifting that's needed to streamline the company. He only took the helm in June 2013 but has already substantially reshaped G4S. A year ago, for instance, he identified 35 businesses to either sell or restructure and six had been sold by end-June 2014. Moreover, G4S sold its Swedish business in July and, earlier this month, agreed the disposal of a US subsidiary that, amongst other things, provides services to the controversial prison at America's Guantánamo Bay naval base.

That should leave the group well placed to take advantage of a market backdrop that remains favourable for most support service players. After all, at a time of austerity governments around the world are looking to cut costs by outsourcing services to companies like G4S. In the UK alone, for instance, government spending on outsourcing has soared to £88bn since the coalition came to power in 2010 - in contrast, Labour spent £45bn on outsourcing during its last four years in office. Set against that background, analysts at broker JP Morgan expect G4S's underlying earnings to grow 35 per cent in the two years to end-2016.

G4S does face challenges, however. To begin with, there's the ongoing Serious Fraud Office investigation into the prisoner-tagging scandal. Should that eventually reveal any further dirt, the shares could easily slip. The debt pile - a hefty £1.7bn at the half-year stage - is also a worry. Admittedly, Mr Almanza has done much to reduce that: disposals, cost-cutting (£30-£35m a year in 2013 and 2014) and a £348m fundraising in August 2013 have helped cut net debt down from nearly £2bn. That said, half-year net debt represented a chunky twice shareholders' equity and G4S spends over £130m a year financing it.