G4S PLC – Overstretched stock amid uncertainties.

G4S PLC (LON: GFS) is a FTSE 250 listed globally integrated Security Company. It provides security guards, alarms, monitoring, management and the transportation of valuables and currencies.

In November 2020, the Company expects to provide the trading update for Q3 FY20.

Investment Rationale – Sell at GBX 213.30

• From trading multiples perspective (EV/EBITDA, EV/Sales, Price/Earnings, and Price/Cash Flow), the stock seems overvalued as compared to Professional & Commercial Services industry.
• The Company’s Gross Margin and EBITDA Margin have remained below the industry median over the past four years. During H1 FY20, Gross Margin and EBITDA Margin stood at 15.70% and 7.70%, respectively.
• The stock is trading close to a 52-week high while 14-Day RSI (76.98 – overbought zone) giving the downtrend signal, a short-term correction in price can be expected.

Risk Assessment

• The risk associated with Covid-19 pandemic and Brexit continued to evolve, which can significantly impact financial performance.
• It operates in a changing and transformative environment, which could affect the business.
• The Company did not pay interim dividend considering the uncertain macro-economic environment and exchange rates volatility.

Recent News

9 October 2020: G4S confirmed that it received an offer from Allied Universal Security Services LLC to acquire entire issued share capital. Meanwhile, shareholders are advised to rescind the GardaWorld’s offer of GBX 190 per share.

Trading Update - for the eight months ended 31 August 2020 (as on 21 September 2020)

• The Group’s revenue remained resilient through the first eight months of FY20 following a robust performance in H1 FY20.
• Secure Solutions revenues, which contributes nearly 93% of Group revenue remained in line with FY19.
• However, tight cost control and reduced interest costs kept the revenue lower by 1.9% year-on-year.
• Further, the Group was able to improve the net debt position while the underlying earnings were in line with FY19.
• The global economic outlook remained uncertain.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion – Take Profits Off the Table

During H1 FY20, the Company was able to improve leverage as net debt to EBITDA stood at 2.58x against 2.90x at the end of FY19. Subsequently, the credit rating agency, S&P raised the credit rating to stable from negative outlook at 'BBB-'. However, the severe impact of Covid-19 pandemic across travel, retail, leisure, and the banking sector can significantly affect the volumes of cash solutions. Moreover, the stock is trading close to a 52-week high, which is raising doubts over the further upside potential. Therefore, it is advisable to book profit now and reinvest the amount of principal and gains at the right time and price. Stock 52 week High and Low were GBX 223.50 and GBX 69.92, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on G4S  PLC at the current price of GBX 213.30 (as on 13 October 2020, before the market close at 8:10 AM GMT+1), while we look forward to reviewing the upcoming catalysts and reinvest at the right price for value investing.  

Blue Prism Group PLC – Loss before income tax widened in H1 FY20.

Blue Prism Group PLC (LON: PRSM) is a FTSE AIM-listed Software Company, engaged in RPA (Robotic Process Automation. Since IPO in 2016, the Company’s market capitalization has grown from GBP 48 million to over GBP 1 billion in 2020.

On 17 November 2020, the Company expects to provide the next trading update.

Investment Rationale – Sell at GBX 1,345.00

• From trading multiples perspective (EV/Sales, Price/Cash Flow and Price/Book), the stock seems overvalued as compared to the Technology industry.
• The Company’s EBITDA Margin and Net Margin are in negative territory, whereas the industry has been delivering positive fundamentals.
• The stock is trading close to a 52-week high while 14-Day RSI (54.28) and 50-Day SMA (1,361.90) giving the downtrend signal, a short-term correction in price can be expected.

Risk Assessment

• Excessive dependence on channel partners, software reliability and performance, could affect the growth trajectory.
• Being an IT company, the PRSM needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the Company’s financial performance.

Recent News:

8 October 2020: BofA Securities had been appointed as additional broker alongside Investec, with immediate effect.

Half-Year Results - for the period ended 30 April 2020 (as on 18 June 2020)

   (Source: Company Website)

• During H1 FY20, revenue grew by 70% year-on-year, and the Company secured £1 million in new monthly recurring revenue.
• The recent fundraising of £100 million bolstered the Company’s balance sheet position to sustain prolonged disruptions.
• The operating cash outflow reduced from H2 FY19, and it plans to break-even cash in FY21.
• The customer base increased to 1,864 customers.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

*Peer: Saga Group PLC, iomart Group PLC, AVEVA Group PLC, and Kainos Group PLC.

Conclusion – Take Profits Off the Table

The Company is still reporting EBITDA loss while the global macro environment can cause further disruption. Moreover, the Company has withdrawn guidance from the market though the customer retention rate remained strong. Similarly, MRR growth rate was adversely affected by the Covid-19 pandemic with delayed pipeline conversions. Given the above uncertainties, it is advisable to book profit now and reinvest the amount of principal and gains at the right time and price. Stock 52 week High and Low were GBX 1,890.00 and GBX 774.25, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Blue Prism Group PLC at the current price of GBX 1,345.00 (as on 13 October 2020, before the market close at 1.20 PM GMT+1), while we look forward to reviewing the upcoming catalysts and reinvest at the right price for value investing. 

 

*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.

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