G4S overhaul begins to pay off as profits rise

By Neil Maidment

LONDON (Reuters) - G4S (L:GFS), the world's biggest security company, posted a better-than-expected 6.3 percent rise in first-half profit as new Chief Executive Ashley Almanza's overhaul began to pay off following a string of high profile fiascos.

The reputation of the British firm, whose operations range from transporting cash to running prisons and protecting ships from pirates, has been battered in recent years due to a failed merger and a number of contract scandals at home and abroad.

"The transformation of G4S is clearly underway," Almanza, who replaced the long-serving Nick Buckles in June last year, told reporters on Wednesday.

"There's much more hard work to be done to capture the full potential of our strategy and to strengthen the group's performance, but the good news is there is a lot to go for."

In 2012 G4S failed to provide enough guards for the London Olympics, and its relationship with the British government worsened last year when it was banned for around nine months from new work after being found to have charged for tagging criminals who were dead, in prison or never tagged.

Overseas the firm has faced issues over the management of a prison in South Africa and operations in Israel, and it has been involved in an Australian probe into deadly clashes at a detention centre in Papua New Guinea where it provided security.

In the past year, Almanza has overhauled G4S management to improve its focus on contract risks and has restructured its British business to better serve government, whose work generates almost 10 percent of its turnover. Its ban was lifted in April and the firm has won government contracts since.

More widely, Almanza's moves to strengthen the company's finances, clean up its sprawling portfolio, reduce costs such as IT and invest in strong emerging markets growth helped the firm post an underlying operating profit of 185 million pounds for the six months to June 30, ahead of a consensus forecast of 177 million.

Its group margin rose 10 basis points to 5.5 percent. The firm said it had won 1.2 billion pounds of contracts in the half and had 4.9 billion pounds of new work to bid for as of June 30.

"These results show the first signs that Almanza's recovery initiatives are having a positive impact on earnings, cash and return on invested capital," said Jefferies analyst Kean Marden, who has a 'buy' rating on the stock.

G4S shares were up 2.1 percent to 265.3 pence by 1011 GMT, valuing it at around 4 billion pounds.

BRITAIN, EMERGING MARKETS

G4S results came a day after British rival Serco (L:SRP), which was also caught in the tagging scandal, reported a 59 percent drop in first-half adjusted operating profit due to the fallout from the fiasco and poor performance on a range of other contracts.

Like G4S, Serco has brought in new management to overhaul the group and restore its reputation in Britain, but the effort is more recent and a recovery is some way off, analysts say. Serco makes about half of its sales in Britain.

Both firms are under investigation by the Serious Fraud Office for the tagging scandal, but Almanza said G4S had made much progress in rebuilding relations with government, although more was to be done.

On Wednesday, G4S continued a portfolio review announced in November, saying it had sold six businesses in the past year for a total of 160 million pounds and would sell or close a further 15 small units, which represent less than 1 percent of group turnover and "barely break even".

It declined to identify those units, other than to say it would sell a manned security business in Uzbekistan.

G4S said it was also in detailed talks with a potential buyer for its up-for-sale U.S. government solutions business, which provides services such as security, fire protection and mine clearance.

Revenue grew 4.1 percent to 3.4 billion pounds in the six months, led by a 12 percent rise in emerging markets, versus a flat performance in developed markets, where growth in North America offset a decline in Europe.

Almanza is focused on expanding its services in emerging markets, which make up almost 40 percent of group revenue and where growth is stronger.

The group said it had hired 263 business development and sales staff in the past year as part of a 15 million pound annual investment to win more work in a "very long list" of emerging markets such as Kenya, South Africa and the United Arab Emirates.

(Editing by Erica Billingham and Jane Baird)