Shares in G4S (GFS) fell by 15 per as the security group said it was feeling the squeeze on profit margins in the first quarter due to European weakness made worse by one-offs such as the closure of 30 Dutch prisons at which they provide staff. But we are sticking with our recommendation (Buy, 292p, 11 April 2013) as we believe G4S has room for manoeuvre by selling assets in the US to reduce net debt of £1.8bn, and that the shares remain cheap relative to sector peers based on their growth profile, dividend and ability to turn margins around.
Chief executive Nick Buckles said as recently as March that margins could remain close to 2012 levels, around 7 per cent, so a 60 basis point fall in the first quarter came as a shock. He warned that he expects further weakness in the year ahead, resulting in analysts shaving 10 per cent off EPS forecasts to around 21.8p.
