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Serco/G4S bulls over-eager

Two high-profile outsourcers have issued positive updates, but investors shouldn't get carried away
December 20, 2018

Two high-profile outsourcers – Serco (SRP) and G4S (GFS) – have finished the year by surprising the market with positive updates. But, despite the warm market reception, it's probably still too soon to declare the sector’s problems over.

IC TIP: Hold at 190p

G4S is contemplating a formal separation – although it insists this does not mean a sale – of its cash solutions arm, something it believes will improve the division's focus, as well as that of the remaining security business. It will not be the first time the group has undergone a significant restructuring. The cash solutions division was only created at the start of this year, when G4S divided its cash and secure solutions businesses – a structure management said at the time had "significant unrealised potential". 

But some think G4S should dispose of the cash business altogether. Having spurned a £1.55bn offer from private equity firm Charterhouse Capital Partners for the division back in 2013, the group's depressed share price could prompt management to change its tune. A review of exactly what form of separation will take is under way, although bosses have been quick to reiterate that the retail cash solutions business is a "market leader". 

Meanwhile, Serco has upgraded full-year expectations – again. Underlying earnings per share (EPS) are now expected to be 5 to 10 per cent ahead of current consensus estimates, both in respect of 2018 and 2019 as a result of a lower tax rate, while net debt should land towards the bottom of the previous £200m to £250m guided range. 

The outsourcer has consistently beaten expectations since the end of last year, having pleaded the case for public sector outsourcing. However, there is no indication as yet whether management might reinstate the dividend. Analysts at Peel Hunt do not expect the group to turn cash flow positive in 2019 either, and instead are forecasting a free cash flow yield of -0.2 per cent, from 0.3 per cent previously.