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.