Barclays downgrades G4S after full year results

Barclays downgraded G4S to ‘equalweight’ from ‘overweight’ and slashed the price target to 200p from 310p following the company’s 2015 results on Wednesday.

The security firm said pre-tax profit fell to £78m from £128m the previous year as it highlighted contract provisions of £65m, restructuring of £44m, losses on businesses being sold or closed of £40m and non-cash charges of £106m relating to the amortisation/impairment of goodwill.

It also cautioned that it could lose a further £57m if the UK government decides to extend a contract to house asylum seekers in Britain.

Barclays said that while weakness in the shares makes it tempting to be contrarian and argue this is a buying opportunity, the reality is that a tougher outlook for emerging markets and the UK is likely to mean G4S’s underlying performance remains sluggish.

In addition, it said the path to lower debt is a long one and likely to include a credit downgrade along the way.

“If we had the luxury of ignoring the near term challenges, the business should still offer defensive growth accompanied by self-help and the 12x PE is at the low end of those in the sector.

“However, trading challenges and a dented confidence in management’s ability are likely to mean the shares stay cheap, for the time being.”

The bank cut its 2016 earnings per share estimate to 16p from 18.1p and its 2017 forecast to 16.6p from 20.7p.

On an underlying basis, Barclays forecasts organic growth of 3.2% in 2016 and 3.5% in 2017, below management’s 4-6% estimate.

At 1026 GMT, G4S shares were down 1% to 185.20p.