FTSE 100 support services firm G4S (GFS) was once the whipping boy of its sector. It had well-documented problems with its contracts including providing security for the London Olympics, electronic tagging of criminals and housing asylum seekers.

The company has spent a long time trying to regain investors’ favour. News in early 2016 of a 39% decline in full year pre-tax profit didn’t help matters, yet the share price eventually enjoyed a recovery rally between July 2016 and June 2017.

Everything was going well until the company flagged new issues in August this year. That subsequently resulted in the share price losing nearly all the gains enjoyed earlier in 2017.

We’re now at the point at which the shares are starting to look good value, hence our ‘buy’ rating. At 256.2p, it trades on 12.6 times forecast earnings for 2018.

What does the company do?

G4S is the global leader in security services including guarding, aviation screening, mobile patrols, prison management and prisoner escorting. It has a technology offering that includes installation and monitoring of alarms, CCTV, access control and biometric systems.

The company is also the European leader and second biggest player globally of cash/valuables transport, cash processing and ATM services.

Why have the shares recently been weak?

G4S in August flagged a lack of growth in the Middle East and India. A trading update on 7 November reminded investors about this issue, plus a downgrade to organic growth forecasts, now 3% to 4% versus a previous 4% to 6% range.

We don’t think there is anything wrong with the business; instead, reading analyst comments it seems some of the weaker revenue growth is just a short-term issue around when new cash management contracts will properly start to contribute to earnings.

Jefferies analyst Kean Marden believes the outlook for the group is much better in 2018. He reckons a new cash management contract will contribute 2% to organic revenue growth from the end of 2017 and emerging markets momentum should also improve over the next 12 months.

Marden also says US wage inflation has accelerated sharply which should benefit the company.

Furthermore, we note a comment in G4S’s latest trading statement about positive momentum with winning new contracts.

Like many companies in the support services sector, investors will have to be patient with G4S. However, we believe the rewards could be good in the medium term. You also get a nice 4% dividend yield while you wait. (DS)

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