G4S continues to look a secure option
Mar 8 2010 by Iain Laing, The Journal
GROUP 4 Securicor. We are retaining our buy recommendation on G4S while revising our fair value estimate higher to 308p.
We continue to view the two main areas for growth as the public sector and developing markets, where structural opportunities exist and contracts are usually bid for at above group margin.
Further, the group is improving its margins year on year, despite slower growth. We believe the main macro drivers, namely inflation, GDP and interest rates, have reached a point of inflexion and, as such, we expect all three of the above to contribute positively as we move into 2010.
In addition, the group continues to make bolt-on acquisitions and currently has a full acquisition pipeline. G4S is the market leader in providing services to the UK Government in the areas of justice, immigration and policing, and we believe the bid pipeline is somewhere in the region of £10bn for UK Government contracts alone.
G4S also faces opportunities in developing markets where the group is number one or two in most of the markets in which it operates. With many contracts inflation linked and reset annually, we believe the group will start to see the benefits in the second half of 2010.
Imperial Tobacco: We are upgrading our recommendation on Imperial Tobacco to outperform and raising our fair value to 2,400p. The market has taken some encouragement from Imperial’s second-half performance, which showed evidence of decent organic top-line growth as well as some margin appreciation.
Aside from the fundamentals of the business, which we believe to be strong, we also suspect that the synergies from Altadis are likely to come in above guidance. The market has left behind Imperial so far this year, with the stock’s low beta probably not working in its favour. With the market increasingly looking for undervalued quality growth stories, we think such under-performance will likely end.
On 10 times next year’s earnings, Imperial is trading at close to 10-year lows in terms of valuation, with forecast earnings growth sitting above its 10-year average of 16%. The payout ratio is moving back in the right direction, with the group offering a 5% dividend yield next year.
We also believe that there is an increasing likelihood of the US government backing down on the current ban on Cuban cigars. As market leader in the category, Imperial is an obvious beneficiary of such a move. National Grid (NG). We continue to like NG for its combination of predictability and growth and it is, in our view, an attractive option for investors looking for UK inflation hedge and to redeploy capital into cheap defensive names. NG’s revenues are positively correlated to UK inflation and the returns on new capital expenditure should more than offset the higher cost of debt we expect for 2011.
Regulatory changes in the UK will not happen before 2013 and upcoming rate cases in the US should underpin growth further. In addition, NG’s 6.1% yield, and its commitment to grow dividend per share by at least 8% per annum to 2012, is among the most attractive dividend proposition in the sector. We are raising our fair value to 695p and retaining our outperform recommendation.
Andrew Miller is regional office head of Barclays Wealth
