G4S share price sinks as group warns of losses on UK asylum contract

Full-year underlying operating cash flow drops

G4S share price sinks as group warns of losses on UK asylum contract

Shares in G4S (LON:GFS) have lost more than 10 percent in London this morning, after the security services group warned on further losses from its UK asylum contract, and posted a drop in its underlying operating cash flow for 2015. The mid-cap group, however, unveiled a rise in revenue and earnings for the year.

As of 08:36 GMT, G4S' share price had shed10.58 percent to 190.19p. The shares are down 16.45 percent in the year-to-date.

Highlights from the company statement:

G4S Chief Executive Officer Ashley Almanza said, "During 2015 we made substantial progress with the strategic and operational transformation of G4S. Our portfolio management programme combined with our investment in sales, innovation and re-structuring is reflected in the results of our continuing operations where the group's revenues rose by 4% and underlying earnings rose by 14%. These programmes remain a priority and are expected to sustain our growth and strengthen our balance sheet.

We continue to actively manage our onerous legacy contracts in the UK which were entered into prior to 2013. We have had to increase the provisions in relation to these contracts. We have also established robust controls governing new major contracts.

Against a background of global economic uncertainty, demand for our services has remained resilient and growth accelerated in the second half of 2015, providing good support for further operating and financial progress in 2016."

New contract sales with total value of £2.4 billion (annual value £1.3 billion) and contract retention rates of c90%

Revenue increased by 4.0% to £6.4 billion. Emerging markets revenues up 8.6%; North America up 5.8%; UK down 3.0%; Europe up 2.6%

PBITA increased by 5.7% to £427 million (2014: £404 million)

Earnings of £227 million (2014: £199 million), up 14.1%

Underlying operating cash flow was £460 million compared with £528 million in 2014, mainly due to a temporary increase in working capital associated with strong revenue growth in the second half of 2015 and transition to a UK shared service centre

Significant progress with portfolio management, increasing strategic focus and raising £281 million to date; further businesses identified for disposal expected to generate additional proceeds of between £250-£350 million over the next 12 -24 months

Net debt at December 2015 was £1,782 million (2014: £1,639 million). Net debt/EBITDA: 3.3x (2014: 3.0x). The business plan supports a reduction in net debt to a level of net debt /EBITDA of 2.5x or lower in the next 12-24 months

The Board recommends a final dividend of 5.82p per share (2014: 5.82p). Full year dividend of 9.41p per share up 1.8%

Outlook

Against a background of global economic uncertainty, demand for our services remained resilient and growth accelerated in the second half of 2015, providing good support for further operating and financial progress in 2016. In the current economic environment we expect medium term demand for our services to grow by around 4-6% per annum."

UK asylum work

Under the UK Compass asylum seeker contract with the Home Office, G4S provides accommodation, transportation and subsistence services for asylum seekers whilst their claims are being processed. This contract commenced in 2012 and runs to 1 September 2017, with a potential extension of a further two years.

In 2014, an onerous contract provision was recognised in relation to the then-current assumptions regarding asylum seeker numbers, the duration and cost of accommodation and support services. We experienced a significant increase in the number of new asylum seekers between November 2015 and January 2016 and as a result the number of asylum seekers in our care increased by 9.6% year-on-year. We have updated the Compass provision based upon our best estimate of the increase in asylum seekers assigned to G4S, the availability of suitable accommodation approved by local authorities and the speed of processing of applications by the immigration authority.

To date, the Compass contract has not been extended and the onerous contract provision has been increased by £20 million to £31 million covering the period to August 2017. Should the contract be extended for the period to August 2019 then, based on the same assumptions as the current provision, a further provision for £57 million would be required.

As of 08:40 GMT, Wednesday, 09 March, G4S plc share price is 212.70p.

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