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G4S earnings-negative on impairment

The security group registered an earnings loss on a goodwill charge, but the problem is at the margins
March 11, 2020

G4S (G4S) improved its adjusted operating margin by 46 basis points through 2019, but earnings headed into negative territory after the security group was forced to take a £291m goodwill charge relating primarily to its UK cash business. Despite the slight increase in unit profitability, there is little margin for error, so the twin challenge for the group is to reduce fixed costs and debt repayment commitments as a proportion of the top line.

IC TIP: Sell at 116.45p

Human capital is integral to the business model, but the group is placing greater emphasis on technology solutions, not only because of enhanced security benefits for clients, but also because they reduce manpower demands.

The group can point to continued strong cash conversion and a 9 per cent increase in operating cash flow to £633m. But net debt as a proportion of cash profits crept up to 2.88, although this was partly linked to the adoption of the new accounting standard covering lease liabilities. Management aims to bring the ratio within a range of 2.0 to 2.5, a process that should be aided by the post-period-end sale of the majority of the group’s conventional cash handling businesses to the Brink’s Company for an enterprise value of £727m, including a debt reassignment of around £60m.

Panmure Gordon expects EPS of 19.8p for 2020, rising to 21p in 2021

G4S (G4S)    
ORD PRICE:116.5pMARKET VALUE:£1.81bn
TOUCH:116.3-116.7p12-MONTH HIGH:242pLOW: 113p
DIVIDEND YIELD:8.3%PE RATIO:NA
NET ASSET VALUE:19.5p*NET DEBT:£2.09bn**
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20156.8678.00.609.41
20167.5929613.09.41
20177.8338715.79.70
2018 (restated)7.511425.19.70
20197.7627.0-5.99.70
% change+3-81--
Ex-div:30 Apr   
Payment:12 Jun   
*Includes intangible assets of £1.49bn, or 96p a share. **Includes lease liabilities of £310m.