Profits leap lifts Olympic gloom for G4S

G4S, which employs 620,000 staff in 125 countries, booked exceptional costs of £88m for the botched Olympics contract.

That followed its admission in July, just weeks before the Olympics began, that it could not provide a promised 10,400 venue guards.

G4S also dented investor confidence in late 2011 with an eventually aborted multi-billion pound takeover of Danish cleaning firm ISS.

But the company said excluding the Olympics, 2012 operating profit was £516m, up six per cent on 2011 and within analysts’ forecast range of between £510m and £520m.

Underlying revenue rose 8.1 per cent to £7.3bn, with improved organic growth of seven per cent.

G4S chief executive Nick Buckles described 2012 as “a tough year”.

“I think the market recognises we had an issue in the UK, but alongside that the business was still robust enough to grow at seven per cent organically, which is probably better than most other UK support services companies, because of our strength across the whole globe,” he said.

The group’s operating margin edged down to 7.1 per cent from 7.2 per cent.

Pre-tax profits fell £91m to £266m once the Olympics loss was factored in.

G4S is one of a number of outsourcing companies which is benefitting from a growing trend of farming out services – previously provided in-house by companies, councils and other public sector bodies – to support services firms.

It competes with other major outsourcers including Capita, Serco, Interserve, Sodexo, Carillion and Babcock.

In Yorkshire, G4S has a contract to provide security services to the region’s crown and magistrates’ courts. It also provides electronic tagging of suspects in Yorkshire.

However, last year it lost a contract to run the Wolds Prison in East Yorkshire, plus it failed to win any further prison contracts.

HMP Wolds prison has been run by the security firm since it opened in 1992 and returns to the public sector in July.

The group provides housing services for asylum seekers in Yorkshire, part of a £203m deal.

G4S also administers the Government’s controversial welfare-to-work scheme in North East Yorkshire and the Humber region.

It aims to help 30,000 people in the region into long-term work.

The Government scheme was recently criticised by the Public Accounts Committee which said its performance was “extremely poor”, with only 3.6 per cent of people referred to it moved off benefit and into work between summer 2011 and summer 2012.

G4S’s settlement with the Olympics organisers meant it posted a loss of £70m on the contract. Combined with £11m for charity donations and external fees, plus £7m for sponsorships and marketing, it amounted to an £88m exceptional charge.

But despite the contract, British Government work rose 13 per cent in 2012, and G4S has won Government contracts worth £30m a year since the Olympics.

Its turnover in the UK and Ireland rose eight per cent to £1.3bn, although margins dipped to 8.8 per cent from 9.7 per cent.

Its continental Europe business performed “reasonably” in a tough market, and organic growth in Eastern Europe has now stabilised to low single digit levels.

Sales in North America were up 11 per cent to £1.3bn, while developing markets grew 15 per cent to almost £2bn.

It aims to grow emerging markets revenue from 33 per cent to 50 per cent of the group by 2019.

The company saw strong growth in Thailand, the Philippines, China and Indonesia in 2012.

“Developing markets growth, investment in key sector expertise and outsourcing trends continue to be key business drivers,” it said.

It plans to invest up to £200m in acquisitions this year, plus sell businesses which do not fit its strategy.

The group’s cash management business, which includes ATMs and cash-in-transit, grew turnover three per cent to £1.3bn.

The group cut more than 1,500 jobs during the year, including 257 in continental Europe.

It is also selling its high-level government security arm in the United States, which had £468m turnover, and has struggled due to federal funding cuts.

Mr Buckles said proceeds from disposals would be combined with its £250m warchest for acquisitions, and would be invested mainly in emerging mar- kets.

Its contract pipeline now stands at £3.5bn per year, the firm added.

The firm also recommended an increase of its full-year dividend by five per cent to 8.96p and announced its chief financial officer Trevor Dighton would retire on April 30 to be replaced by Ashley Almanza, the former CFO of natural gas firm BG Group.

G4S also expects to appoint a new chief operating officer within the next few months.

“As expected, losses in relation to the Olympics fiasco dominate the numbers, with pre-tax profit falling by nearly a third... Nonetheless, optimism in the group’s ability to recover remains,” said Hargreaves Lansdown analyst Keith Bowman.

Backing from the analysts

Analysts at Investec Securities said G4S remains “cheap relative to the broader outsourcing sector”.

“We continue to believe that the valuation discount can unwind further, with G4S set to recover further poise into 2013,” they said.

Panmure Gordon analysts said while the results look “a bit messy” with the exceptional and discontinued items, “we think the overall organic growth and margin outlook is favourable, especially given some headwinds evident in the business”.

“We... are likely to maintain a positive stance on the shares.”