Investment Column: Investors will get security with G4S stock

Tullett Prebon; Axis-Shield
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The Independent Online

Our view: Buy

Share price: 187.8p (+11.3p)

The casual reader of the business pages of any newspaper may be forgiven for thinking that it is all doom and gloom out there. G4S, the FTSE 100-listed group that specialises in security services, would beg to differ.

True, the company wheels out the same hackneyed nonsense about being "recession resilient," rather than sticking its neck out and admitting it is having a whale of a time, but its full-year numbers, published yesterday, do show that despite the economic malaise, the group is going great guns.

G4S reported a rise of 23 per cent in full-year earnings. More importantly for investors, the shares closed the day up 6.4 per cent, and the all important dividend is up 29 per cent. Despite revenue growth slowing in the fourth quarter, which punters should view as a concern, the company is confident that 2009 will be another bumper year, driven by more outsourcing deals.

So is there a bear case? Well, the shares have traded down in the past year, but they have done so by less than the market average. What's more, as a result of recent softening, the stock is inexpensive, trading at 10 times 2010 earnings, according to analysts at Killik Capital. Those at Cazenove offer that trading on a 2009 price-earnings ratio of 8.6 times, G4S comes at a discount to rival Securitas, which has said in recent weeks that it is starting to feel the recessionary pinch.

G4S's business is essentially an outsourcing one, and by claiming that it can save clients' money, it has obvious benefits in these markets. A move to doing more government-related work is a plus, and the fact that the company does 70 per cent of its work in areas other than the UK, US and northern European, where the group admits some of its clients are going bust, also helps. We think G4S is one of the better stocks available. Buy.

Tullett Prebon

Our view: Hold

Share price: 171.5p (+35.25p)

Investors have not thought that much of the inter-dealer broker Tullett Prebon in the past year, and were it not for other stocks doing very badly indeed, the firm's annual share price drop of 70 per cent before yesterday would look disastrous.

The company, which operates in various markets, including fixed income, rates and energy securities, gave investors reason for serious cheer yesterday, however, posting a stellar 36 per cent rise in full-year pre-tax profits that sent the shares up 26 per cent: the best performance by a FTSE 250 company.

Investors face something of a dilemma. The group is performing well, and clearly the downturn, which was first apparent in the financial markets, is having a limited effect, especially with the group thriving on the market volatility. The market is not giving the company credit for this performance, however, and the share price remains poor.

One persuading factor could be the group's share price, which, according to Evolution, "on four times our 2009 [earnings per share] estimate the stock is cheap". The analysts are somewhat divided, however, and those at Panmure Gordon warn that "the statement gives no catalyst for a re-rating, while major structural concerns continue to overhang the shares. The outlook lacks substance, earnings visibility continues to be poor and revenues are reported to have slowed in the first few months of 2009".

We are impressed by the numbers, and accept the volatility argument. But whether the market will continue to back the group after yesterday's results remains uncertain, and we would wait to see if investors stay supportive. Hold.


Our view: Buy

Share price: 295p (+2.5p)

Regular readers of this column will be well aware that the biotechnology sector has not been flavour of the past year or so with investors. Too many groups have relied on the old model of burning through vast quantities of cash before going cap-in-hand to backers who have understandably tired of the whole thing.

Thankfully, the diagnostics group Axis-Shield is not one of these groups, and it has been well rewarded by the market, with its shares up by more than 10 per cent in the past year. Yesterday, the group issued its full-year results, saying that despite a pre-tax loss of £4.3m, revenues were up 27.8 per cent, and the group is confident of double-digit growth in 2009. The loss included exceptional items, without which 2008 was a profitable year.

The chief executive, Ian Gilham, says the company, which specialises in devices that save the need for sending tests off to laboratories, will benefit as healthcare providers look to save costs on other expensive diagnostics procedures, and that its primary device will add another 2,500 sales this year.

Shares in the biotech market tend to move on news, good or bad. We reckon that Axis-Shield is likely to have more good news than bad this year. Buy.