G4S slumps on Deutsche Bank downgrade

G4S was under pressure on Wednesday as Deutsche Bank downgraded the stock to ‘sell’ from ‘hold’ and cut the price target to 165p from 235p saying the risk/reward continues to lie on the downside.

DB said that if the company’s disposals are executed as planned, it could de-lever to less than 2.5x net debt/EBITDA by 2017.

Deutsche said a weaker pound might make the UK Utility Services business more affordable to foreign buyers, but there are risks to the proceeds and timing of disposals.

DB reckons small disposals can fetch about £50m of proceeds and UK utility services can be sold for £100-150m.

“We have no strong view on the potential for proceeds from the Israel business (a proxy structure similar to the US government solutions business) and the Children’s Services UK and Youth Services US businesses, which in our view would together need to generate £150-200m of proceeds.”

Still, the dividend payout is likely to be rebased lower to allow the group to de-lever organically in the medium term and enable some M&A, the bank said.

“One could see G4S’ 5% dividend yield as attractive, but in our view the payout is too high and at risk of being cut.

“Even if leverage steps down helped by disposal proceeds, the fundamental issue of a low cash conversion over the coming few years remains – onerous contracts (we assume Compass is renewed to 2019) and pension deficit payments weigh on the conversion from net income to free cash flow and we see further risk if restructuring costs are higher than we forecast.”

At 0811 BST, G4S shares were down 2.3% to 180p.