LONDON (Reuters) - The new boss of G4S faces a major test next week, when interim results give him an opportunity to show how he plans to improve the reputation and finances of the world’s biggest security company following a series of blunders.
Gaffes including last year’s last-minute failure to provide thousands of security guards for the London Olympics have complicated the company’s efforts to win outsourcing contracts, especially in the UK, its home market.
Falling profit margins, a shake-up of Dutch prisons and client problems in Africa led G4S to cut its profit forecast in May. Then, in July, Britain’s government barred it from new work after a scandal over the electronic tagging of criminals.
Investors want to know how such management failures can be avoided at a business spanning 125 countries that provides services from running prisons and immigration centres to cash transportation and security guards at ports and oil facilities.
The work is often lucrative and the market is growing as governments grappling with big budget deficits try to slash costs. But the stakes are high given the involvement of profit-driven private companies in sensitive areas such as prisoner welfare and air safety.
Ashley Almanza replaced embattled G4S CEO Nick Buckles in June, just weeks after joining as chief financial officer, and has been travelling the globe getting to grips with the company.
Analysts have suggested he may carry out a rights issue to pay down debt, although asset sales were another option.
Speculation of a capital increase has put added pressure on G4S shares. The stock is down 4 percent this year after they were hammered by the May profit warning. That compares to a 10 percent gain in Britain’s benchmark FTSE 100 index.
Its stock valuation compared to peers still looks healthy, however, a sign investors believe the company’s scale puts it in a good position to exploit strong growth in emerging markets, despite its British problems.
G4S trades at a price to forward earnings ratio of 11.7 times, compared with 11.6 for Securitas, the world’s number-two security firm, according to Thomson Reuters data.
Almanza is likely to push through new cost savings. But full details of his plans for G4S are unlikely to come until October or November, a source familiar with the situation told Reuters.
G4S’s operating margin narrowed by 0.6 percentage points in the first quarter from a year earlier and it said in May that the margin was unlikely to improve for the rest of the year.
It did not state its actual first-quarter operating margin at the time. In full-year 2012, the margin was 7.1 percent.
“The first question (for Almanza) is whether he thinks this is a 7 percent margin business still, or whether he lowers that guidance,” said an analyst who asked not to be named. “Then, are there further businesses to be divested?”
G4S has appointed a chief operating officer who will look at contract risks and help it avoid another Olympics-style mess-up.
Investors are keen to hear how Almanza will deal with Britain’s decision to put all contracts with G4S under review. The government said it would not award it any new work for now after an audit found G4S had charged for tagging criminals who were either dead, in prison or never tagged in the first place.
Rival outsourcing firm Serco is also being investigated.
G4S had remained in the running for a new electronic tagging contract, but this month decided to withdraw its bid - something the government had wanted but which G4S initially refused to do. That contract was won by Capita on Tuesday.
Almanza is unlikely to unveil his asset sale plans so soon. Investors expect him to divest some less profitable activities in developed markets and push faster into emerging markets.
Such sales would help G4S cut its net debt, which stood at 1.8 billion pounds at the end of 2012, 2.7 times its earnings before interest, tax, depreciation and amortisation. The company has a target of between 2 to 2.5 times.
Analysts say a share rights issue is also a possibility to help pay back debt.
Cantor Fitzgerald analyst Caroline de La Soujeole said potential proceeds from disposals, including the planned sale of G4S’s U.S. business, meant a cash call was not vital but remained a possibility.
“It is not unreasonable to suggest the new team may announce a modest rights issue, giving themselves some breathing space, starting their tenure from a clean sheet,” she said.
The company is expected to report an 11 percent decline in first-half operating profit to 211.18 million pounds because of weaker profitability in Europe, according to a Reuters poll of five analysts.
(This version of the story adds a dropped phrase in first paragraph.)
Editing by Tom Pfeiffer and Erica Billingham