G4S is back in the game after the scandals

It’s a timely moment for investors to take another look at this sometimes contentious, often accident-prone group. For shareholders, its abortive attempt to buy ISS, the cleaning company, in 2011 was a particular low point. For the public, its failure to provide enough security guards for the 2012 Olympic Games was a national embarrassment. For taxpayers, its attempt to overcharge for electronic tagging of criminals in 2013 was infuriating.

Yet under Ashley Almanza, its chief executive, G4S seems to have entered a happier era. Tempus tipped the shares at 227p last August and they are now trading at nearly 325p. Worries about its debt and the sustainability of its dividend have faded. Mr Almanza is dumping the string of non-core companies acquired in a different era. And he is narrowing the focus back to security, anywhere in the world. In this era, it looks to be a growth industry.

That was borne out by the company’s quarterly trading update this month, in which it reported an 8.9 per cent rise in revenues from continuing businesses, though this was partly down to the one-off boost of a big contract win with Walmart. Perhaps the most promising area for enhancing profits, though, still lies in properly integrating the 900-odd operating businesses in the group. In humdrum areas such as invoicing, procurement and human resources, there are still big savings and scale efficiencies to be garnered.

G4S is slowly changing and its exposure to the UK (about 15 per cent of revenues) and to the British government (about 5 per cent) will continue to dwindle. America is by far its biggest market. It seems on track to get debt down further this year to 2.5 times ebitda profits.

Expected earnings per share this year of 19p put the company on a multiple of 17 times, while it yields 2.8 per cent. After the strong share price performance of the last year, further progress will be tougher, but Mr Almanza is beginning to prove he can deliver. If and when he hits his leverage target, he can begin to lift the dividend, which should give the shares some fresh impetus.
My advice Buy
Why Strong market position and more efficiencies in store

J Sainsbury
The City has long been sniffy about J Sainsbury, questioning both the strength of its core grocery business after three years of falling profits and the retailer’s move to buy Argos, the catalogue retailer, for £1.4 billion last year.

However, that hasn’t fed through into its valuation. Unlike Tesco and Wm Morrison, Sainsbury’s is still trading at its normal long-term rating of about 14 times’ earnings and about six times ebitda profits. It also yields roughly 3.6 per cent, which is slightly above the market average. The latest grocery data from Kantar Worldpanel show Sainsbury’s continues to trade soundly, with total sales up 1.7 per cent in the past 12 weeks. Pedestrian but solid.

The much-derided acquisition of Argos seems to be paying off. The savings to be made as Sainsbury’s closes some Argos stores and places concessions in its larger outlets are coming through. There is also evidence that placing Argos stores in Sainsbury’s outlets not only improves the performance of Argos but also has a “halo effect” on grocery sales.

The full impact of these synergies, and the grocer’s wider £500 million cost-saving programme, will start to be fully realised only from about 2019 onwards.

There are risks. Sainsbury’s has a lot of work still to do integrating Argos against a backdrop of a highly competitive market. It is also not clear what impact Tesco’s proposed £3.7 billion acquisition of Booker, the wholesaler, might have on Sainsbury’s grocery business, where profits are already under pressure.
My advice Buy
Why Well managed, good brand and the swoop on Argos is paying off

Futura Medical
Getting from a laboratory on to a doctor’s prescription pad does not happen overnight. Updates on drugs that progress to expensive late-stage trials are, therefore, crucial and closely scrutinised. Futura Medical, a Guilford-based biotech company, underlined this yesterday when it said that regulators in America and Britain had not thrown up any big issues ahead of its plans to take a gel to treat erectile dysfunction into a third phase of trials.

Eroxon, as the gel is branded, has been in development for about 16 years and in September cleared a key hurdle when, in a study, it dramatically improved erectile dysfunction in 232 men. James Barder, chief executive, had called the results a “game changer”, boosting Futura’s ambition to take a $1 billion-a-year chunk of a $5 billion market.

However, regulators still require additional safety data. The company can proceed with its existing plans to start the late-stage trial this autumn, make submissions for marketing approval in 2019 and aim to launch in 2020. In the meantime, its hopes to strike a licensing deal should be boosted. The shares, which soared last September, were unchanged at 55½p.
My advice Hold
Why No serious setback, but regulators not fully satisfied

And finally...
Neil Woodford has been shopping, acquiring a 9 per cent stake in Countryside Properties, the housebuilder, for £126 million. The stockpicker was one of several buyers of a 23 per cent holding offloaded last week by Oaktree Capital. Aviva was another, lifting its stake from 6 per cent to 7 per cent, and other newcomers could be revealed in the coming days. Mr Woodford has already revealed himself as a big fan of the sector, buying into Taylor Wimpey and Barratt Developments.