EUR 850.00 For Business Accounts Only

Morningstar | Glad to See the Back of 2018, G4S Shares Offer Attractive Upside From Here

No-moat G4S delivered a set of full-year results in line with our expectations. A number of one-off charges, including a GBP 100 million settlement of a class-action lawsuit relating to a legacy issue around employee rest breaks, and a GBP 35 million charge relating to pension benefits with Lloyds banking group, had an impact on headline results. Overall, however, we did not see anything that materially changes our thoughts and future expectations of the business. As such, we reiterate our GBX 337 fair value estimate for the stock and believe the current malaise offers an attractive entry point.

The bad stuff first. Cash solutions, the moatiest area of the business, had a pretty poor 2018. At the half-year mark, we noted the double-digit decline in revenue, which was due to tough comps following a large contract win with Walmart in 2017. For the full year the decline fell into single-digit territory, with the underlying cash business, excluding the retail cash solutions, delivering positive growth of 0.5%. As we overlap the tough comps in 2019, however, we expect positive growth in both areas of this segment to shine through. Although the separation review is ongoing, we believe it is likely the cash business will be spun off in the second half of 2019.

Secure solutions, which generates 78% of group revenue, had a better performance. The business exited a number of lower-margin contracts in the Benelux region, which had the effect of reducing revenue growth to basically flat, but improving margins, in Europe and the Middle East. The other regions performed strongly, with revenue growth of 5%-6% and margin improvement across the board. Also encouraging was the proportion of secure solutions revenue deriving from integrated contracts rose from 40% to 45% over the period.