Investment Column: Security firm G4S offers growth and protection in tough times

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The Independent Online


Our view: Buy

Share price: 205p (+1.75p)

In most years, investors could be forgiven for being less than impressed by a company that had delivered only a flat year-on-year share price. In the last 12 months, however, given the hammering some stocks have taken, a flat performance is to be admired.

That is what the security group G4S has managed to achieve. As we head for a recession, the company reported yesterday that it is on track to hit annual growth of more than 10 per cent: the chief executive, Nick Buckles, says that in the last 20 years, come boom or bust, the group has always grown.

While G4S is braced for a downturn from private-sector clients, its work involves a lot of public-sector work, such as securing nuclear power plants and providing services in Iraq and Afghanistan, which it reckons will more than compensate for any drop-off from corporate customers.

As such, analysts were queuing up to back the stock. Those at Deutsche Bank noted that yesterday's update was "a very solid statement and positive call. [The company] should report double-digit earnings per share growth next year, with a stable revenue line. [It] trades at 11 times 2009 earnings and 7.5 per cent free cash flow yield. [The company] looks well underpinned at these levels."

The shares are not cheap, and a serious recession will have an impact on the company. However, with more private-sector companies looking for ways to cut costs and outsource non-essential activities, such as security, G4S is well set. The fact that the group operates in 120 countries and does not rely on any of them, except the UK, for significant profits is a plus too.

The stock gained only 0.9 per cent yesterday, suggesting the good news is already priced in, but punters looking for defensive shares should not worry about that. Buy.


Our view: Buy

Share price: 609.5p (+36p)

In life there are only two certainties, so the saying goes: death and taxes. Dignity, the funeral home operator, is keen for at least half the status quo to continue. As a raft of companies report worrying numbers, Dignity issued a solid if not terribly exciting update yesterday, saying that it is on track to hit full-year expectations. If investors thought the statement alittle dull, that was the intention, according to the finance director, Mike McCollum.

At the risk of stating the obvious, people are going to carry on dying, whether we are in the midst of a recession or not. So far, the only bit of spending on a funeral that is discretionary – the quality of coffin and the expense of the service – is yet to see clients cutting back, argues Mr McCollum.

Undoubtedly, Dignity is a safe punt, but the shares are pretty pricey, even if they have come off by nearly 15 per cent in the last month. Watchers at the house broker Investec argue that Dignity "is a very high quality business that should command a premium rating. We think the current weakness is a great opportunity to build a stake in a business that should be both robust in a sustained downturn and perform well if market sentiment improves."

The shares, trading at 14 times forward price-earnings, are cheaper than they have been in recent months, without any under-performance of the business. Buy.


Our view: Hold

Share price: 678p (-21p)

If you had to pick the two worst sectors for investment today, arguably you would plump for retailers and property. That being the case, it is unlikely that buyers would be thinking about buying shares in the property Reit Hammerson, which issued a market update yesterday: 70 per cent of its holdings are in the retail sector, which is expected to have a torrid time in next few months.

That, however, is not the whole picture. It is true that retailers are feeling the pain, but as Hammerson's chief executive, John Richards, points out, the group is not a retailer itself, and while some of its clients are struggling, recent developments have achieved notable successes. In the last few months, for example, Hammerson has launched three new retail sites, and has let more than 90 per cent of units on opening.

Analysts at JP Morgan have Hammerson as the preferred stock in the UK sector, while those at Arbuthnot argue that the share price will hit 918p in the next 12 months.

The group is robust, but in the wider sector there is a great deal of uncertainty, especially given the lack of liquidity from the banks, which is hampering growth. This should make investors wary. Hammerson itself has put new developments on ice until the end of next year, and it would be prudent of buyers to do the same. Hold.