While Carillion PLC grabs the headlines, Citibank has been looking at another former government favourite – G4S PLC (LON:GFS) – and has decided the stock is cheap.
Following on from UBS’s upgrade of G4S to ‘buy’ last week, the US bank has upgraded the security services provider to ‘buy’, saying the stock offers “improving organic growth trajectory, cost savings, re-financing benefits and industry consolidation optionality”.
READ: UBS says industry shifts underestimated for G4S, upgrades to 'buy' from 'neutral'
The organic growth rate should hit a trough this quarter, Citi believes, after which it should accelerate towards 5%, helped by easier comparative figures and a bottoming out of trading conditions in the Middle East and India.
CASH360, the group's retail cash solutions system, is ideally positioned to rapidly grow a portfolio of high-margin contracts, Citi believes.
Sales have already been achieved in nine countries and pilots in six more countries have been lined up.
“We forecast 25% top-line growth from 2019,” Citi said, referring to the CASH360 business.
“Walmart is an important reference client, providing valuable client testimonials,” it suggested.
The bank sees the margin on underlying earnings (EBITA) expanding to 7% in fiscal 2019 from 6.6% in 2017, due to self-help initiatives and the growth of the higher-margin CASH360 business.
READ: G4S slumps as it lowers revenue outlook after flat performance in Middle East and India
The peer group average is 7.4% so the scandal-hit group still has some catching up to do.
Trading on an enterprise value (market capitalisation adjusted for debt and cash) of 13.5 times projected EBITA for fiscal 2018, this is an 11% discount to the business services sector.
Citi expects the company will deliver “impressive” 10% earnings per share compounded annualised growth between now and fiscal 2010, plus it has a reasonably attractive dividend yield of 3.5%, hence the bank’s upgrade to ‘buy’.
Citi has a target price of 350p; the stock currently trades at 288.5p, up 0.6% today in a falling market.