Investment Column: G4S remains a secure bet after strong results
Wednesday 16 March 2011
Our view: Buy
Share price: 258.6p (+1.7p)
The global appetite for security services shows little sign of dimming. G4S – which provides security staff for everything from nightclubs to embassies, as well as offering police-training services – is a case in point.
G4S reported turnover up by 4.1 per cent to £7397m while profits rose by 4.2 per cent to £527m over the year to the end of December. Margins were maintained at 7.1 per cent with strong cashflow generation of £422m. Add in the company's confident outlook for 2011, and it is flush enough to increase its dividend by 14 per cent.
It has been a busy year. The group has invested £65m in a series of acquisitions in Latin America, particularly Brazil, helping to boost revenues from its "new markets" division to a third of total profits, from 29 per cent in 2009. Thanks to the boost, G4S managed to offset the ongoing recessionary hit in its core US and UK markets.
The company's chief executive, Nick Buckles, was yesterday trumpeting the results as the "sixth consecutive year of underlying revenue, profit and dividend growth since G4S was formed in 2004". "The excellent performance in 2010 has been achieved despite continued uncertainties with the global economic downturn, which is testament to the efforts of our global workforce," he said.
But he was also bullish on the outlook for the year ahead, thanks to signs of recovery in the group's larger developed markets in the US and UK. "We remain confident about the outlook for 2011 when we expect to deliver an improved organic revenue-growth performance whilst continuing to maintain our discipline on margins and cash generation," he said.
Mike Allen, an analyst at Panmure Gordon, is less effusive, but still positive on the stock. "Overall results do not look spectacular but the valuation remains undemanding, and the company looks better positioned for growth this year," he said, noting the particularly cautious expectations for UK Government spending.
Perhaps crucially, G4S shares are trading at around 11.9 times forward earnings, making the stock attractively valued in comparison with peers.
Our view: Hold
Share price: 11.75p (-1.25p)
There was little singing and dancing when Luminar issued its year-end trading up yesterday, although the figures were better than feared, according to analysts. Same-outlet sales for the year to 26 February were down by 18.6 per cent, with the decline being driven by a "reduction in admissions". Still, Luminar said that while trading during the last seven weeks of the year had remained challenging, "the rate of decline has improved, with same outlet sales down 12.3 per cent on the previous year".
Looking ahead, the company said it had successfully launched Jongleurs comedy nights at four clubs and planned to extend the offering to a further eight clubs in coming months. It was also looking to open "a number of bars at its clubs during the day and early evening", in places where there it saw scope for extra profits.
So, a fair bit of negative news, but also some scope for improvement. From an investment point of view, the market already appears to be discounting much of the bad news, with Luminar trading on around 3 times enterprise value to earnings before interest, tax, deprecation and amortisation, according to Altium.
That means this is not a sell. But as Panmure Gordon points out, Luminar is not so cheap when considered in terms of enterprise value to earnings before interest and tax. On that metric, it ends up on a multiple of nearly 16 times. Add in the fact that, while the rate of decline in sales may be easing, the wider economic picture remains cloudy at best, and we find it hard to justify too bullish a stance. We would wait a while for some concrete signs of recovery before wading in.
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