After a long period of deliberation, G4S (GFS) is about to receive its punishment for failing to properly staff its London 2012 Olympics security contract. Analysts reckon it will be fined between £60 million and £70 million by Locog, the London 2012 organisers. This would exceed the guided £50 million but would be much less than the previous demand from Locog of £150 million.
G4S failed to deliver 10,400 security guards in time for last summer's sporting event. The contract was worth £284 million and the upcoming fine will be docked from this fee. The deducted money will cover £36 million for extra troops and £6 million for additional police officers needed to meet G4S' shortfall.
The service group's share price has rallied 15% to 279.4p since November 2012 which suggests that the market is not worried about the impending fine. Indeed, it only represents a small percentage of G4S's £3.9 billion market cap. Receiving the fine could actually be beneficial as it will draw a line under one of the group's most testing periods.
Stockbroker Panmure Gordon has today (11 Feb) increased its price target from 295p to 320p on G4S, reiterating a 'buy' rating. 'This implies 15% upside potential with a yield of 3% on offer, which looks attractive in our view,' it says.
Analysts had initially worried that G4S would be shunned from future outsourcing tenders because of the spectacular way in which it failed the Olympics contracts. Panmure Gordon notes that the Ministry of Justice – G4S' biggest customer, accounting for 40% of 2011 revenue – has made it clear that the Olympics contract will not play a role in future decisions, with the quality and price of bids the key driver. It believes the volume of work is likely to increase ahead of the next general election in the UK in 2015. The broker adds that there are clear signs that G4S has not been 'blacklisted' by the UK government, which accounted for 10% of group revenue in 2011.
There have still been setbacks elsewhere in the business. A plan by three police forces to outsource services to G4S collapsed in January. Bedfordshire, Cambridgeshire and Hertfordshire forces wanted to hand over the running of joint IT and human resources activities. G4S reckoned the deal would have saved the three forces more than £100 million over 10 years. The service group already has an outsourcing deal with Lincolnshire police force.
G4S's full-year results are scheduled to be published on 13 March. The Locog fine is expected to have been issued beforehand and should 'allow investors to draw a line under this saga', says Panmure Gordon. It believes investors may then focus on attractive free cash flow trends with a forecast yield of 7% in 2013, rising to 8% in 2014, both ahead of the 5% to 6% average across the support services sector.