G4S - Investment Case
Our Go Forward Business
Security is a growing service industry and we believe that G4S has the expertise and global footprint to grow core security revenues (81% of Group revenues) at 4-6% per annum and generate margins of 5-6% (excluding Security Consulting and Technology).
As a result of our investment in technology we are deriving an increasing proportion of revenues from technology enabled solutions and at the end of December 2019, around 47% (2018: 45%) of our Secure Solutions revenues included technology in the customer service.
Our technology-enabled security solutions includes our Secure Consulting and Technology business (11% of the Group) where we are targeting revenue growth of 10-12% per annum and margins in the range of 8-15%. Our technology focus creates additional security and efficiency benefits for customers and increases our ability to differentiate G4S’s offering in the security market, which in turn supports our goal of accelerating profitable growth.
G4S has retained certain businesses from the Cash Division where we believe we can maximise shareholder value by benefiting from significant growth opportunities driven by our industry-leading position in Retail Technology Solutions. Our Retail Technology Solutions businesses are expected to grow very strongly at 14-16% per annum and generate margins of c15%. In addition, G4S has retained a number of conventional cash businesses, including the UK business.
The shape of the group post the sale of the majority of the conventional cash businesses (at H1 2020) is summarised below:
Our progress in implementing our strategic objectives is measured using key performance indicators aligned to those objectives and to the group values.
Financial - Core businesses
|Revenue (£bn)||We have an organic growth strategy based on strong market positions in structural growth markets.
We have invested in improved customer service, innovation and sales and business development capabilities. There is also great potential to sell more complex solutions which tend to have longer contract terms and higher margins.
Over the medium term we expect to grow revenues on average by 4% to 6% per annum
In 2019, revenues grew 4.7% to £7.7bn (2018: £7.3bn), with Secure Solutions organic growth of 4.4%, reflecting strong growth in Africa, Asia and the Americas and Cash Solutions organic growth of 2.9%.
The Group has implemented a number of
Over the medium term we expect to benefit from higher growth and higher margin technology solutions.
In 2019, Adjusted PBITA was unchanged compared with 2018 at £501m. Secure Solutions declined 1.7% whilst Cash Solutions increased 3.9%.
Operating cash flow (£m)
A key priority for the Group is to drive improved cash generation, through enhanced working capital management and capital discipline and embedding a “cash matters” culture throughout the Group.
Operating cash flow was £633m (2018: £582m), an increase of 8.8%. The cash conversion rate was 126% (2018: 118%). Good cash flow and working capital management performances were delivered across most of the Group.
|EPS (pence per share)||
G4S is aiming to deliver sustainable growth in underlying earnings over the long term. Underlying EPS growth is acomponent of both the annual and long-term management incentive plans.
Earnings increased by 0.8% to £263m (2018: £261m) in 2019.
EPS was 0.6% higher at 17.0p (2018: 16.9p).
Following the sale of the majority of the conventional cash businesses, the 2019 results were restated for the disposed businesses. Click here for more information.
Other financial and non-financial KPIs
In addition to the financial KPIs, the Group has a set of performance measures aligned to its strategic priorities. These measures include employee retention, contract and customer retention, lost-time injuries and other health and safety measures.
A description of these performance measures and our progress against them is shown throughout our strategic report.
NET DEBT MATURITY
As per the 2019 Preliminary Results announcement, 11 March 2020, The Group’s main sources of finance and their applicable rates as at 31 December 2019 are set out below:
|Debt instrument/ Year of issue||Nominal amounta||Issued interest rate||Post hedging average interest rate||Year of redemption and amounts (£m)b|
|US PP 2007||US$105m||6.06%||2.73%||79||79|
|US PP 2008||US$74.5m||6.88%||6.88%||56||56|
|US PP 2019||US$162m||4.90%||3.83%||124||124|
|US PP 2019||US$188m||5.12%||4.32%||144||144|
|Public Bond 2016||€500m||1.50%||2.25%||438||438|
|Public Bond 2017||€500m||1.50%||3.24%||423||423|
|Public Bond 2018||€550m||1.88%||2.80%||476||476|
|Term Loan Facility 2018||US$350m||3.13%||3.13%||264||264|
|Revolving Credit Facility 2018c||£750m (multi-currency)||1.71%||1.71%||11||229||240|
a Nominal debt amount, for fair value and carrying amount see note 19 of the release.
b Translated at exchange rates prevailing at 31 December 2019, or hedged exchange rates where applicable.
c Of the £750 million revolving credit facility, £34 million matures in August 2023 with the remaining £716 million maturing in August 2024. As at 31 December 2019 the Group had drawn down £240 million from the facility.
The average cost of the Group’s borrowings, net of lease liabilities, was 3.6% (2018: 3.9%).
On 31 March 2020, the Group’s credit rating was re-affirmed by Standard & Poor’s as BBB-, with a stable outlook. As at 31 December 2019 the Group had liquidity of £1,279 million (2018: £1,423 million) comprising cash, cash equivalents and bank overdrafts of £519 million (2018: £673 million) and unutilised but committed facilities of £760 million (2018: £750 million).
During the year, the Group issued $162 million of US private loan notes maturing in May 2026, and $188 million of US private loan notes maturing in May 2029. The Group also repaid £350 million of GBP public bonds bearing interest rates of 7.75%, and US$145 million of US private loan notes bearing interest rates of 5.96%. As at 31 December 2019 the Group had drawn down £240 million from the RCF facility (2018: undrawn). In June 2019 the Group exercised an option to extend the term of £716 million of the £750 million RCF by a further year, taking it to 2024. In July 2019 the Group entered into a £300 million bridge facility for 12 months with an option to extend for a further six months, amended in December 2019 to £250 million with a 3 month extension so that final maturity is October 2020. This was undrawn as at 31 December 2019.
The next debt maturities are the $74.5 million US private loan note due in July 2020 and the $350 million term loan facility due in 2021. The Group has good access to the capital markets and a diverse range of finance providers. Borrowings are principally in pounds sterling, US dollars and euros, reflecting the geographies of significant operational assets and earnings.
As announced on 23 March 2020, notwithstanding the Group’s strong liquidity and robust business continuity plans, the board considers that the uncertainty relating to Covid-19 and its impact on economic activity in our key markets has increased substantially since the date of the Group’s preliminary full year results announcement.
In these circumstances, the board has concluded that it is prudent and therefore in the best interest of the company that G4S does not pay a 2019 final dividend. Accordingly, the board is not proposing to recommend the payment of a final dividend in respect of the full year 2019 at the forthcoming Annual General Meeting.
Once the adverse impact of Covid-19 has abated, it is the board’s intention to restore the dividend, taking into account the board’s objective of attaining dividend cover of 2x and thereafter pursuing a progressive dividend policy.