Investment Column: Uncertain world bodes well for G4S

Chime Communications; Hochschild Mining

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The Independent Online

Our view: Buy

Share price: 264.4p (+20.8p)

It is a rather depressing fact that G4S is now the world's second largest private sector employer after WalMart.

The security company, which has picked up the contract of the Olympic and Paralympic games in 2012, yesterday unveiled a solid set of interim results, which should come as little surprise given the state of the world at the moment.

Revenue grew 5 per cent to £3.8bn while pre-tax profits came in at £149m, also up 5 per cent. Margins eased a little, but not enough to cause any serious worry. The business, which notched up a resilient performance during the recession, is growing steadily in most of its markets, and that is likely to continue.

Just look at the UK: the FTSE 100-listed business has lost its contract to transport prisoners to and from British courts. But it has picked up plenty of new work to offset that. With a coalition Government keen to outsource more work to the private sector, together with the fears created by the recent riots, the company's business has good prospects.

Elsewhere, the picture is largely similar. One expense people are not likely to scrimp on if we move into another downturn, is security.

Looking at the stock, we said buy at 258.6p in March and the shares are little changed from that, having found some momentum over the last few days having been caught up in the recent turmoil which hit shares indiscriminately.

At this level, the shares are cheap by some metrics compared to other outsourcing companies. In terms of earnings multiples, they trade in line with global peers at 10.7 times forecast full year earnings. There is also a healthy prospective yield of 4 per cent. We are a little concerned about the company's debt: gearing stands at 94 per cent.

With plans to invest £200m a year on acquisitions, borrowings will increase. However, as the valuation and the results demonstrate, G4S shares should serve investors well over the coming months.

Chime Communications

Our view: Sell

Share price: 201p (-11p)

Chime was ringing the bells yesterday having recorded its 12th successive set of results showing growth in both operating income and profits. The former was up 10 per cent, while the latter rose by 13 per cent.

The group's advertising business was the driver, and sports marketing also put in a strong performance. But Chime's largest business, public relations, actually recorded a decline thanks to the company taking a hit to its main US Government contract. The turmoil in the Middle East has also impacted on the business (Chime had been advising the Economic Development Board of Bahrain, but instability put an end to that).

In general, we are troubled by the fact that Chime's business is heavily reliant on just two major clients, which represent 20.4 per cent of operating income. They have both been retained since 2003, but things can change quickly and unexpectedly.

It has long been the case that companies cut advertising and PR spend first when trouble looms – and trouble is looming. This is not terribly sensible. But it is a fact that does not bode well for the company.

We haven't looked at Chime since March 2009 when we said hold at 67p. Since then, the shares have recovered very strongly. While they trade on an undemanding multiple of just 7.7 times full year earnings, now would be a good time to cash in.

Hochschild Mining

Our view: Buy

Share price: 461.9p (+3.9p)

Just in case you hadn't noticed, gold is very much in fashion these days. But shares in the gold and silver producer Hochschild Mining are down sharply since the start of the year.

Back in June, it was the focus of concerns about the election of a left-wing former army commander as the new president of Peru, where it operates. Then, in July, it reported a fall in first half output. Although the latter result was expected, the shares have remained under pressure.

Given the pullback, yesterday's half yearly results should drive a rebound, in our view. Hochschild posted its highest ever first half profit, as it drew steam from record gold and silver prices. At the same time, it said it was on track to meet its full year production target.

To put it differently, the results showed that the market has been far too bearish, and the recent weakness presents a buying opportunity.