G4S boosted by Jefferies upgrade to 'buy'

Security services company G4S was on the front foot on Wednesday as Jefferies upgraded the stock to 'buy' from 'hold' and lifted the price target to 330p from 270p.

It noted that the shares have underperformed on the back of disappointing second-quarter organic revenue growth, but said momentum should recover in the first half of 2018, helped by improving emerging markets and US wage inflation.

"A new Cash360 contract should contribute 1% to organic revenue growth from Q4; emerging markets momentum should improve over the next 12 months; US wage rate inflation has accelerated sharply; and the bid pipeline continues to edge higher," it said.

Jefferies pointed out that according to the Bureau of Labor Statistics, security wage inflation has accelerated sharply to 10-15%.

"G4S and Securitas believe this will positively impact industry revenue growth in FY18E and encourage customers to consider their higher margin technology solutions. We agree, but are mindful that the industry has sometimes passed through higher costs with a lag. Consequently, we assume a 10 basis year-on-year decline in the North America FY17E EBITA margin."

In addition, the bank argued that G4S's price-to-earnings looks increasingly cheap relative to history and peer Securitas, especially as the gap between adjusted and reported earnings per share has narrowed.

At 1005 GMT, the shares were up 3% to 289.50p.