Reuters: Hot Stocks: UPDATE 2-Security group G4S hit by Dutch prisons shake-up

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UPDATE 2-Security group G4S hit by Dutch prisons shake-up May 7th 2013, 11:43 Tue May 7, 2013 7:43am EDT * Group margin down 0.6 pct in Q1, similar expected for full year * CEO says year profits will be 40-45 mln pounds lower than expected * African writedown also blamed * Share price drops 14 percent (Adds comments by CEO, analysts, background on previous problems) By Christine Murray LONDON, May 7 (Reuters) - G4S, the world's largest security services firm, warned on Tuesday that its profits in 2013 would be lower than expected after a shake-up of the prison system in the Netherlands and problem clients in Africa hit first-quarter results. The firm, which provides services ranging from security guards to cash transportation and the running of prisons, said in an unexpected trading statement its profit margin fell 0.6 percent in the first quarter and was expected to remain at a similar level for the full year. Chief Executive Nick Buckles said that as a result, profits for 2013 would be 40 to 45 million pounds lower, sending shares in the British group down 14 percent and wiping nearly 600 million pounds ($854 million) off its market value. Before the statement analysts were on average forecasting a pre-tax profit of 457 million pounds in 2013, according to Thomson Reuters I/B/E/S Estimates. Shares in the firm had risen 19.1 percent so far this year, ahead of the near 11 percent rise in the FTSE 100, but were trading down 14 percent at 262.7 pence by 1050 GMT on Tuesday, giving the firm a market value of 3.7 billion pounds. Coming on top of last year's major embarrassment over the last-minute failure to provide thousands of security guards promised for the London Olympics, the profit warning also raised renewed questions about Buckles' own position. In late 2011 Buckles had to abandon an $8 billion deal to acquire Danish cleaning services group ISS after a shareholder revolt, severely denting investor relations. "In the wake of a bad 2012, the current year is looking equally challenging," said Keith Bowman, an analyst at Hargreaves Lansdown Stockbrokers. "G4S appears to be suffering a dose of its own medicine, with both government and corporate desire to save costs now impacting at the group itself. "A change of chief executive could now be a step nearer." Buckles, who had to defend his job after the Olympics staffing fiasco and in March had said the company planned to drive growth in 2013 by increasing its presence in emerging markets, attributed the fall in margin to a catalogue of problems stretching from the tough economy in Europe to cash issues in Africa. Half of the fall in margin in the three months to end-March came from a 6 million pound write-down on client bills in Africa, where the firm makes 7 percent of its revenue, mostly on a large security contract in the Republic of Djibouti. For the rest of the year the biggest factor in pushing down profits will be the closing of 30 prisons in the Netherlands due to an unexpected restructuring of the justice service by a new minister. The firm had previously expected its prisons business there to grow from 35 million euros a year to around 55 million with further outsourcing. But Buckles said that G4S's current contract in the sector will now be phased out in the next six months. "The loss on this contract could be upwards of 6 million-plus," he said. Other problems include tough trading conditions in Romania, Hungary and the Czech Republic, where the firm offers its full range of security services, and lower volumes in its offender tagging and prison service contracts in Britain. Buckles said that the firm would also push in the next few months to stem declining margins in its cash transportation businesses in the UK and Ireland where it has been in a price war for the last couple of years. David Brockton at Espirito Santo, who has a "sell" rating on the shares, said that the firm would need to make further divestments and acquisitions to sustain the trajectory of growth. In the first three months of the year revenue rose by 7.5 percent at constant exchange rates, the firm said, while organic growth was up 6 percent at group level, but up 12 percent in its developing markets. ($1 = 0.6439 British pounds) (Editing by Greg Mahlich) Link this Share this Digg this Email Reprints

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