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G4S profit hit by contract blunders

RESULTS: Olympic contract blunders and restructuring charges hit first-half results and, as cost pressures rise and the dividend remains flat, we remain cautious.
August 28, 2012

Rising costs and contract blunders held back first-half results of security firm G4S, despite growth in developing markets driving revenues there up 10 per cent to £1.19bn. So, while underlying organic revenue was up 5.1 per cent in the six-month period, adjusted operating profits were flat at £236m. Moreover, with broker Canaccord Genuity expecting full-year adjusted pre-tax profits to fall from £435m to £408m, giving EPS of 21.6p, we retain our cautious stance.

IC TIP: Hold at 261p

The plunge in group reported profits was partly down to a £50m exceptional charge representing the likely loss on the Olympics security contract. However, the reputational damage may be more far reaching, as the government is due to decide on major prison outsourcing contracts in the coming months. Rising wage pressure also ate into profits and operating margins, which declined from 6.5 per cent to 6 per cent. G4S is hoping to combat this with 1,100 job cuts at a cost of £24m in the first half and a further £10m in the second half, generating annual savings of £30m from next year.

G4S (GFS)

ORD PRICE:261pMARKET VALUE:£3.7bn
TOUCH:261-262p12-MONTH HIGH:293pLOW: 214p
DIVIDEND YIELD:3.3%PE RATIO:36
NET ASSET VALUE:97p*NET DEBT:119%

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20113.691517.703.42
20123.90612.103.42
% change+6-60-73nil

Ex-div:19 Sep

Payment:19 Oct

*Includes intangible assets of £2.5bn, or 176p a share