Join our community of smart investors

G4S recovery hopes diminish

The outsourcer said investment in new products will result in flat profits this year, prompting a double-digit drop in the share price
November 7, 2018

G4S (GFS) does not expect profit growth in 2018, sending the shares down as much as 17 per cent and once again knocking confidence in management's turnaround strategy.

IC TIP: Hold at 193p

The outsourcing giant is building out its technology capabilities in the hope of driving growth, but the cost of investing in new products and services means profit before interest, tax and amortisation will be flat on 2017. Last year's profits reached £496m from the core business, which brokerage Jefferies said would be equivalent to an earnings per share (EPS) cut of 4-5 per cent this year. 

What’s more, tight labour supply is expected to hold back revenue growth in the year. Sales grew just 0.2 per cent in the first half of the year overall due to a strong comparative period in 2017, but organic growth appears to have slowed between the second and third quarters of the year from 4 per cent to 2.5 per cent.

This announcement is the latest bad news in what has been a fairly weak year for G4S. The shares began to fall after the first-half numbers showed net debt had exceeded management’s target of 2.5 times adjusted cash profits. A few weeks later, in August, the government took over running of HMP Birmingham from the group, citing “serious concerns over safety, security and decency”. Some analysts have started to question the strategy, with Jefferies saying the group “still struggles to gain momentum” after five years – although it maintained a 'buy' rating on the shares.

Still, the focus on technology is generating pockets of progress throughout the business. Demand for the technology-enabled security services the group has been developing led to 5.7 per cent sales growth, while in the cash solutions business tech-based offerings more than offset a decline in conventional cash solutions. A spokesperson for G4S said the company expected increased demand from private banks for outsourced cash handling as the use of physical currency declines.