View from City Road: Securicor tries to guard profits

ONCE upon a time, before the current UK recession began and Cellnet started sending in fat dividend cheques, the core managed businesses run by Securicor Group and Security Services, its 50.75 per cent-owned twin, used to earn a 20 per cent return on capital.

In 1991 these managed businesses, spanning Securicor guarding, cash carrying, parcel deliveries and vehicle maintenance, hit rock bottom, making operating profits of just pounds 3m for Securicor Group, after restructuring costs, on sales of pounds 519m.

Management has certainly seen the light. In the year to September profits from the managed businesses rebounded to pounds 12.1m and Securicor now declares that it intends to restore the 20 per cent returns of yore over the next three to five years.

Since return on capital last year was 5 per cent this looks a tall order, since it implies a fivefold leap in profits to more than pounds 50m in today's money over the period.

Most cost savings have been implemented, but Securicor points to new markets worth pounds 1.5bn arising from government privatisations of the Royal Mail, Parcelforce, police and defence vehicle maintenance and HM Prisons, where the company is already tendering for Strangeways, Manchester.

Organic growth of this quality would help offset any future worries about the Cellnet goldmine. Feared migration from Lifetime's premium business market has been minimal so far. After 44 per cent growth last year, Cellnet could easily be 30 per cent ahead this year, taking Securicor profits to pounds 66m and explaining a fairy-tale p/e of 21.4 at 643p. Hopes of a BT buyout of Cellnet will also linger on.