G4S Drops on HSBC Concern About Margin Pressures: London Mover

G4S Plc (GFS) fell the most in almost four months after HSBC downgraded the world’s largest security company on concern profitability is under pressure, just three days after the stock recovered from a Summer Olympics debacle.

The shares declined as much as 4.9 percent, the biggest drop since Nov. 8, and were down 1.9 percent at 10:33 a.m., paring the gain this year to 11 percent. G4S was the worst performer in the FTSE 100 Index and the volume of shares traded was about 15 percent more than the three-month daily average.

“The market is disproportionately focused on G4S’ U.K. public sector travails,” Alex Magni, an HSBC analyst, said in a note cutting G4S to underweight from neutral. “Instead we think margin pressure is a bigger concern.”

The U.K. stripped the Crawley, England-based company of a contract to operate the Wolds prison in November and excluded it from a contest to manage several other facilities in the wake of its failure to supply enough security staff for the London Olympics. That forced the government to draft in extra troops to augment protection for athletes and spectators.

G4S declined 17 percent in four days in July after the company said it couldn’t handle its Olympics responsibilities. On Feb. 19 the shares closed higher than the pre-crisis price for the first time.

G4S fired two executives in September as a result of the Olympics fiasco and said 10 days ago it would incur a loss of 70 million pounds on the contract, with additional costs of about 18 million pounds of donations together with sponsorship and marketing costs. That was less than expected.

Margin Pressure

U.K. public sector work accounts for only 10 percent of the company’s revenue, Magni said. “A much bigger risk is building” in weak pricing for the provision of security services, he said.

“Margins are under greater pressure,” particularly in Britain, “where manned security rates have fallen well behind minimum wage trends,” he said. “We do see latent risk in other developed markets where real wages for basic services have been negative for several years.”

G4S would need a “distinct improvement” in hourly billing rates to recuperate its margins, said Magni.

G4S garners more than half of its revenue outside Europe and has been looking to expand into higher-growth markets, where about one-third of company profit is generated, according to Chief Executive Officer Nick Buckles.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editor responsible for this story: Douglas Lytle at dlytle@bloomberg.net

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