G4S - accountants still at work

G4S (GFS.L): No one would say that the recovery at G4S is the finished article yet, but there are signs that Ashley Almanza is making solid progress. Mind you, their rag tag army of employees (£9 per hour, no expenses) at this year’s Wimbledon, still needed to go to charm school and get uniforms that fitted. In this week’s interims, to 30^th June 2015, continuing revenue (at constant currency) was up 2.8% at £3,285m, with good growth in their increasingly important emerging markets and North America, alongside modest growth in Europe, offsetting a modest fall in the UK. Not a great result but revenue is still going in the right direction. The profit before interest, tax and amortisation, rose 4.9% to £193m, although £5m of the £9m improvement came from cutting corporate costs. Eps were 6.1p, up from 5.6p on the back of which the interim dividend has been raised by an encouraging 5% to 3.59p, after five years on hold. Net debt was flat at £1,677m (2014: £1,680m), with net debt to EBITDA edging down from 3.1x to a still hefty 3.0x. A caveat to all this, is that these numbers are after stripping out currency effects, discontinued businesses, businesses identified for disposal and restructuring costs. These included £8m on an asset and liability review, £9m on legacy contracts, and £16m on re-structuring. There was also a £9m charge comprising £21m of goodwill impairment offset by £12m of disposal gains. The effect of all this accountancy can be seen in the unadjusted eps of 2.3p, down 54%. There is more work to be done on execution though, with 16 businesses having been sold since 2013, but 30 more are for the chop. Looking back and clearing up the past is one thing, but the group has also won new contracts worth £1.4bn (£680m annualized) alongside a pipeline increment of £2.2bn and a 90% retention rate on existing business. Overall the group comments that momentum has been building through the first half.

Consensus eps for this year are at 15p, rising to 17p next year. At a soggy share price of 261p that is a PE of 17.4x dropping to 15.4x. Meanwhile the 5% interim dividend increase points to an annual of 9.7p for a yield of 3.7%. A similar 5% rise in 2016 would take the yield to 3.9%. Back in March, with the shares at 285p, I felt that there was no rush to invest. The shares are a bit cheaper now and progress has been made, so they are better value, but I don’t see why income investors need rush into the stock until more momentum has been built up and the clean up is nearer completion. (Neil Cumming^, 13^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower