G4S PLC – Higher Value Solutions to Drive Positive Margin Mix

G4S Plc (LON: GFS) is a globally integrated security company. The group provides security guards, alarms, monitoring, management and the transportation of valuables and currencies.

On 17th June 2020, the Company will hold the annual general meeting. In August, GFS will announce its results for the six months to 30 June 2020.

Recent News
On 5^th May 2020, the Company announced the appointment of Michel van der Bel, as a non-executive director, with effect from 7 May 2020.

Q1 FY20 Trading Update (as on 30^th April 2020)
The Group provided the trading update for the three months ended 31 March 2020.For the first quarter of 2020, the Group revenues increased by 2.5 per cent as compared with the corresponding period of the last year, with a 2.3 per cent decline in Cash Solutions and 2.9 per cent growth in Secure Solutions. On a year-on-year basis, the revenue in March 2020 was broadly unchanged. Revenue in Europe & Middle East region reduced by 1.4 per cent and in Africa unchanged. For the month of March, the secure solutions revenue increased by 1.4 per cent as compared with March 2019. On 31 March 2020, the Group had liquid resources of GBP 1.1 billion, which includes committed, unutilised credit facilities of GBP 0.5 billion and cash, cash equivalents and bank overdrafts of GBP 0.6 billion. 

Share Price Performance

1-Year Chart as at May-22-20, after the market closed (Source: Refinitiv, Thomson Reuters) 

On 22^nd May 2020, G4S PLC’s shares closed at GBX 87.02 and were down by 2.27 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 223.50/GBX 69.92.

Valuation Methodology
 


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the EV/EBITDA multiple of GFS was 5.3x and the same multiple was lower as compared with the Support Services industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Prospects
2019 was a year of significant progress, both in terms of revenue growth (up 4.7 per cent as compared with 2018) and the subsequent announcement of the sale of the majority of conventional cash businesses. 4%-6% growth per annum for security services between 2017-2027 is also expected.

Conclusion
The Company witnessed an organic growth of 2.5 per cent in revenue. GFS unveiled that Covid-19 outbreak does not have a material impact on the year-to-date performance till March 2020. The Group has continued to make good progress with the completion of the sale of conventional cash businesses and till date completed approximately 71 per cent of the transactions, realising GBP 518 million in cash proceeds. The group’s robust business continuity plans and strong liquidity will help the company to tackle the uncertain period. The long-term, fundamental strength of the international security market, together with the competitive strength of the Retail Technology Solutions and Secure Solutions businesses, underpins the confidence in the outlook for the Group. The business plan reflects commitment to remain financially sound with a new target of maintaining net debt to EBITDA between 2.0x and 2.5x in the medium term.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from GBP 6,863 million in FY15 to GBP 7,758 million in FY19. Compounded annual growth rate (CAGR) stood at 3.11 per cent.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 87.02 (as on 22^nd May 2020) with lower double-digit upside potential based on 9.93x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).

Wincanton PLC - Decent Trading Update Amid Elevated Global Volatility
Wincanton Plc (LON: WIN) is an Industrial Transportation company providing supply chain solutions and consultancy services to admired brands globally. Wincanton is Britain’s biggest logistics firm with an employee base of nearly 17,700 people, operating in over 200 sites with a 3,600-strong fleet of vehicles.

Preliminary results originally planned for 20th May 2020, will be postponed until mid-June. On 2^nd October 2020, the Company will release its half-yearly trading update.

Trading Update (as on 14^th May 2020)
The Company provided the update on trading and management actions in this period of unprecedented disruption and uncertainty, along with an extension to its current banking facilities. In April 2020, the Group revenue decreased by 15 per cent year-on-year, with a negative impact on year-to-date profitability and significant variations in the level of performance across the Group's businesses and segments. In the light of COVID-19, the Company is taking several actions, which includes the furlough of 15 per cent of workforce; board and executive management temporary 20 per cent pay reduction; deferral of pension recovery payments; HMRC payment deferrals until Q4; delay of non-business critical capex; and suspension of the final dividend. Currently, the Group has a committed Revolving Credit Facility (RCF) of GBP 141 million, which matures in October 2023.  Additional liquidity secured through a GBP 40 million RCF extension, available for twelve months from May 2020, bringing the total available facility to GBP 181 million. For the year ended 31^st March 2020, the Group’s performance was in line with market anticipations with revenue growth of more than 5 per cent.

Share Price Performance

1-Year Chart as at May-22-20, after the market closed (Source: Refinitiv, Thomson Reuters) 

On 22^nd May 2020, Wincanton PLC’s shares closed at GBX 187 and were down by 3.61 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 319.00/GBX 140.00.

Bearish Technical Indicators
At the current trading level, shares were trading below its long-term crucial support level of 20-day and 50-day Simple moving average price, and it could fall further from the current trading level. From the price-performance standpoint, its shares have delivered a negative return of approximately 38.88% on a year to date basis and losses of around 22.41% recorded in the past one-month period.

Conclusion
The company operates in a challenging environment,which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The company remained well-positioned with a decent pipeline, which will help them to improve their performance in the long run. In the short-term, the prevailing economic and political uncertainty faced by the Transportation Services industry across the world, together with the impact of the Coronavirus (COVID-19) outbreak on the operations, pose continued and additional headwinds to performance.

At the current trading level, the stock was trading quite below its short-term crucial support level, a bearish technical indicator, which reflects prices could move down from the current trading level.

Based on the valuation and factors as highlighted above, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 187 (as on 22^nd May 2020), with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 26th May 2020).

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