Jefferies downgrades G4S on EM tail risks

G4S was under the cosh after Jefferies downgraded the stock to ‘underperform’ from ‘hold’ and slashed the price target to 170p from 260p.

“Emerging market headwinds could offset self-help initiatives in 2016, prompt S&P to reintroduce a negative outlook and require G4S to repair its balance sheet again,” it said.

Jefferies said although this is not its central case, “when the path is credible and the margin for error is slim, a nervous equity market will start to discount it”.

It said investors are nervous over EM tail risks, which include FX headwinds, a deterioration in organic revenue growth, and ratings agencies revising their outlooks. It also pointed to the risk that G4S issues equity to avoid a £25m to £30m interest step up if it loses its investment grade status.

Jefferies also argued that austerity policies could dent 2016 revenue growth.

“Commodity exporters are suffering and new budgets were unveiled by Saudi Arabia, Venezuela and Qatar in December and by Algeria a few weeks ago. These austerity policies probably didn’t impact G4S’s Emerging Market momentum in H215 but could in FY16E.”

Jefferies cut its 2016 earnings per share estimate by 9% to 14.7p, which it noted is 9% below the consensus average.

At 1004 GMT, G4S shares were down 6.2% to 196.40p.