EUR 850.00 For Business Accounts Only

Morningstar | Prosegur Delivers Amid Strong Foreign Exchange Headwinds. See Updated Analyst Note from 27 Jul 2018

Security specialist Prosegur, the only security company in the business services sector to which we have awarded a narrow moat rating, delivered a solid first half. While adverse currency movements had a heavy impact over the period, organic revenue growth continued its strong trajectory, hitting 8.4%, while EBIT margins improved by 40 basis points to 9%. This pattern of margin improvement we have witnessed in recent years is predicated on operational improvement in Prosegur's guarding business and a shift to higher-value activities in both the cash and guarding businesses. We believe the company can expect to improve margins by a further 160 basis points over the next 10 years on this basis. While we adjust our forecasts for currency impacts, our renewed thoughts on margin progression, and the time value of money, we reiterate our EUR 7.10 fair value estimate for the stock. We believe the stock currently represents an attractive investment opportunity.

On a divisional basis, cash continued its pattern of growth, with organic revenue increasing 9% over the period and margins ticking up by 20 basis points. The announced expansion of the cash business into five new Central American countries was welcome news, particularly if the market structure in this region proves similar to that in South America, where Prosegur generates operating margins of close to 20%. The guarding business also saw a margin increase of around 20 basis points as the take-up of integrated security contracts increased, with organic revenue growth of just over 6%. Alarms continued to growth at a blistering pace, with connections rising by more than 15% over the period. While margins in this business are currently negligible, we believe that at the current run rate, the requisite scale will be reached in the next five years, at which point margins should begin to ramp up steadily.