The full impact of the Olympics contracting fiasco is laid out in G4S's (GFS) financial results today where pre-tax profit for 2012 fell by 31.9% to £175 million. A cautious outlook statement on European operations has contributed to a 3.4% drop in the share price to 297p, yet this comes on the back of a steady rally since November 2012, so there could be an element of profit taking today.
The challenge for G4S is to get the markets to forget the troubles of the past few years (which included a failed, over-ambitious takeover) and remind investors why it became a FTSE 100 service group in the first place through hard work and geographical/skills growth.
In a year's time, it will be interesting to see if the market judges today's results as the turning point for the business. Although the shares have dipped on the news, most analysts remain positive on the stock and see upside for its market valuation.
The latest set of results were hit by two items. Firstly, it lost £88 million on the Olympics contract. Secondly, its UK Government Solutions business has been treated as a discontinued item, even though it remains part of G4S. The low-margin business has been put up for sale and analysts reckon it will be gone within six months. It has suffered from government spending cuts.
The outlook is now 7% organic growth in 2013 with flat margins. Investec had expected 5.5% organic growth in 2012 but G4S delivered a solid 6.9% organic revenue gain. Analysts are encouraged by 2012's cash conversion which was 95% (excluding exceptional items) versus 85% in 2011. And a 5% increase in the dividend to 8.96p is also a pleasant surprise given that many companies would use a troubled year as an excuse to withhold shareholder rewards.
A new chief financial officer has been unveiled in Ashley Almanza, former finance boss of FTSE 100 oil and gas group BG (BG.). This fresh face will help in the quest to regain market support.
The acid test will be winning sizeable new business. G4S needs to show that the Olympics scandal hasn't ruined its reputation.
Developing markets remain crucial to G4S's growth. They represented a third of group revenue and 37% of group profits in 2012. G4S says they continue to perform well and there are expectations of 'strong double-digit' growth in 2013. North American commercial and UK government businesses performed very well in 2012 but investors have been told by G4S not to expect such levels of high growth this year.
Canaccord Genuity entitles its research note on today's results as 'A clean state', which is an appropriate description for G4S's situation.