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Kepler Cheuvreux starts G4S at 'buy'

Kepler Cheuvreux initiated coverage of G4S with a 'buy' rating and 310p price target as it said that new management's "less is more" strategy is about to deliver a significant boost to the group's profitability while putting the security company on a steadier growth path.
Kepler pointed out that for the last four years, management has been busy addressing past issues. It has focused on repairing its balance sheet, selling non-core assets, discontinuing onerous contracts and introducing new internal processes to promote operational excellence and provide more innovative security and cash handling solutions for its clients.

"Although this has made G4S's investment case hard to follow, we believe payback time is rapidly approaching. Now, the company is poised to benefit from a series of self-help refinancing and cost-saving catalysts, while its portfolio has been pruned to the core, just as the group is about to return to a more reliable 4-6% organic growth path."

It said the strategy has made G4S a slower but safer investment, while its new focus on operational excellence and innovative security/cash handling solutions may lead to margin progress by 2020.

With costs under control, Kepler estimated that the margin should improve by 10-20 basis points a year, while soon the cash flow should benefit from the end of the Compass contract.

In addition, it noted that G4S is trimming its central costs and rolling out its Javelin human resources management platform worldwide. At stake are at least £70-80m worth of cost savings by 2020E and greater control of the margin.

At 0955 BST, the shares were up 1.8% to 272.40p.

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