Morningstar | GFS Updated Forecasts and Estimates from 03 Sep 2018
Security giant and market leader G4S provided a reasonable first-half update, in which organic revenue growth accelerated to 2.8% in the second quarter, following a revenue decline in the first quarter against tough comparables. Operating margins disappointingly declined by 20 basis points year over year to 5.9% on an adjusted basis. Given the positive momentum in the second quarter and the early stage in the year, however, we do not expect to make any changes to our full-year forecasts at this point, and we reiterate our GBX 337 fair value estimate and no-moat rating. We believe the shares offer an attractive upside opportunity.Regionally, we were pleased to see stabilisation and a return to growth in the recently problematic Europe and Middle East business, with organic revenue increasing by close to 1% in the first half. While margins here dipped by 40 basis points, we believe this will improve over the course of the year as this business continues to recover. Asia remained the growth driver in secure solutions, with organic revenue growth of 7.7% and margins flat year over year at 6.5%, as the business shrugged off the issues experienced in its Indian business in late 2017. One area of disappointment was in the cash solutions business, which generates about 15% of group revenue, and where revenue declined by 13.4% year over year. This was primarily due to tough comparatives year over year, following large contract wins in first-half 2017, but we will be keeping a close eye on growth in this business over the coming quarters.
Structurally, there were some noticeable improvements made over the period. The penetration of integrated contracts continues to increase, with 42% of the secure solutions division’s revenues now derived from these contracts, up from 39% at the end of 2017. Integrated contracts offer margins almost double those of vanilla guarding contracts, and so expansion of this offering should naturally lift margins across the business.
G4S is a security company that provides security and related services. Co.'s Secure Solutions products are comprised mainly of manned security and facilities management services, and its Cash Solutions products are comprised mainly of physical cash management services. Within the Secure Solutions services, Co. also provides: technology services, comprising the supply, installation and monitoring of alarm systems, and security and building systems technology; facilities management; and care and justice services. Within the Cash Solutions services, Co. also provides technology services to retailers, comprising hardware and software for customer cash management and related services.
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