Sign up UNITED KINGDOM
Proactive Investors - Run By Investors For Investors

G4S downgraded by HSBC on rising wage cost concerns

It's a difficult to understand company, HSBC complains; difficult to like, too, by the looks of things
G4S security van
Going for gold: G4S is in the midst of a transformation programme

G4S PLC (LON:GFS) is changing, but into what is hard to discern, according to HSBC, which has downgraded the disgraced security services provider.

The bank says G4S moves business lines in and out of its “portfolio” and “discontinued” segments, making it hard to work out what the trends are for the bits of the business that will be left after the group’s transformation strategy is complete.

In HSBC’s view, the group breaks down into two business lines: guarding and cash handling.

The former is labour intensive and although the group probably pays above minimum wages for the most part, but HSBC predicts cost base pressure in the coming years.

As for the cash handling business, who uses cash anymore?

Obviously a lot of people and businesses, but the stock’s valuation is depressed by a perception that this is a declining business threatened by the rise of electronic payments.

HSBC is not so sure.

“We have struggled to find compelling evidence that there is a rapid movement to less cash circulating. In fact, no one knows how many times a note in circulation is used. Most countries show growth in cash withdrawals from ATMs and in those that do not there are alternative explanations,” HSBC notes.

The bank’s earnings forecasts are a few percentage points below the median forecast numbers for the next three years, largely because of higher assumption on wage costs.

Although the stock has been downgraded from ‘hold’ to ‘reduce’, the bank sticks to valuing the stock on a multiple of 13.4 times projected earnings per share for 2018, which leads to a rise in the price target from 245p to 259p.

“The complexity of numbers, and the still relatively high debt burden, make us hesitant to use a higher forward multiple,” the bank stated.

Shares in G4S fell 2.4% to 293.6p after the downgrade.

John-H.jpg


Register here to be notified of future GFS Company articles
View full GFS profile View Profile

G4S Timeline

Article
November 02 2016
Article
November 12 2014

Related Articles

drillcore.png
May 05 2017
Revenues are up, as are underlying earnings, while the company is also splashing the cash
Electronic security equipment
January 31 2017
With Newmark Security, it is wise to take a long-term view
secure payments button
March 22 2017
Nik Philpot, chief executive of the AIM-listed group, said: “The strong progress we have made in the US this year is clear, both in terms of the value of the contracts and the quality of those future earnings"

© Proactive Investors 2017

Proactive Investor UK Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use