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Morningstar | We Trim Our G4S FVE but Still See Attractive Upside

G4S is the largest security provider in the world, with estimated share of around 12% in a highly fragmented market. Its primary business activities centre on providing manned and mobile guarding, security systems, and cash-management services. The company also provides outsourcing services for governments, such as back-office systems for police services, employment support services, and even the management of entire prisons.Having spent several years at the beginning of the decade overextending itself into areas removed from its core competencies, G4S is now focused on its primary businesses and driving revenue and margin growth through upselling to its clients and providing more value-add services. Examples of this can be seen in Cash 360, a program in which G4S effectively assumes the back-office functions for retailers, recycling cash within their business, thus reducing the need for external collection and counting services as well as working-capital requirements. Other value-added services include risk consulting, in which G4S analyses the current setup of companies and advises on and provides solutions to operational risks that the companies are exposed to. These activities not only allow G4S to enhance margins above those from basic services, but also enable it to differentiate itself from smaller peers with inferior capabilities.Over the longer term, we believe G4S can benefit from several structural trends. Corporations' increasing focus on operational risks and an increased disposition toward outsourcing of noncore operations should incrementally boost activity in G4S’ higher-margin offerings, such as risk consulting and security systems. Similarly, rising levels of travel have resulted in increased exposure to potential disease pandemics and international terrorism. This has led to airports and transit centres continually looking to increase and improve security measures, which, while good for the security industry, particularly benefits firms like G4S with high-end knowledge and capabilities.