Investment Column: Investors can lock up returns with G4S

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G4S

Our view: Buy

Share price: 249.9p (-2.9p)

The analysts at Investec started their research note on the security group G4S yesterday by saying that there was no material change in yesterday's third-quarter trading update.

Indeed not: the group may not have changed anything, but nobody can complain about its stellar performance. The largest security group in the world, and incidentally the FTSE 100's biggest employer with nearly 600,000 staff in 110 counties, said that operating profits were up 12 per cent in the nine months to September, adding that sales had risen by 9 per cent.

The group has been one of the darlings of the downturn, with the stock trading up by more than 25 per cent in the last year: despite vastly improved equity markets over the last six months, many leading shares are still in negative territory on the full year.

According to the Investec watchers, that may be G4S's downfall, however. The analysts point out that as a support services stock, the group has to compete against companies offering a wider range of services. "We have concerns that margin pressure will grow on single service providers. We continue to prefer Mitie for its lower valuation (11.3 times our 2010 estimated earnings) and broader range of services which provides, in our view, greater outsourcing opportunities," they say.

G4S is more expensive, trading at 12.6 times Investec's estimated 2010 earnings, but it does offer a reasonable expected dividend yield of 3.2 per cent, which is a lot better than some other stocks on the FTSE 100.

We would be backers of the shares. The equity markets have had a good run in recent months, but there are concerns that some gains have been a little too enthusiastic.

G4S continues to trade well and has some exciting plans to expand into the potentially huge Chinese and Brazilian markets next year.

Those that have held G4S over the last 12 months can only be pleased with the way the group has performed. We would predict that the next 12 months will be equally fruitful. Buy.

Inmarsat

Our view: Hold

Share price: 621p (+26.5p)

"Hello? Hello? I'm on the plane," is the sound that fliers will increasingly have ringing in their ears as the use of mobile phones is permitted on airlines. While it will undoubtedly increase the number of air rage incidents, it will also help to lift revenues at Inmarsat.

Inmarsat provides voice and high speed data services to "almost" anywhere on the planet – the polar regions are the exception – whether on land, sea or in the air. The group owns 11 satellites in orbit and sells its services through global partners, and is doing pretty well for it. British Airways launched a mobile service on its route to New York using the London-based satellite communications group's technology, following Ryanair and Emirates Airlines.

This is not the only growth area for the group as it is also set to launch a global satellite handheld device for voice calls in remote regions, as well as growth at its core maritime business which has been going great guns.

The group put out third-quarter numbers covering the three months to the end of September yesterday, which beat analyst expectations.

Ebitda was up 18.4 per cent and pre-tax profits rose 30.8 per cent, helped by cost-cutting.

Yet the group looks at a pretty full value to invest, especially as takeover interest from Harbinger seems to have receded. It is on a price-to-earnings ratio of 28.7 times consensus for this year's numbers, ahead of its peers, so hold for now.

Kier Group

Our view: Hold

Share price: 1040p (+12p)

Finance director Deena Mattar cannot explain the performance of Kier's shares. The construction group issued a trading statement yesterday, saying 2010 should be a cracker. The shares are nonetheless feeble. According to analysts at Investec, the stock, "on a conservative sum-of-the-parts basis, in our view, offers over 100 per cent potential upside".

Ms Matter says the subdued price is frustrating, but concedes that a number of factors may be responsible: the group was recently fined £18m by the OFT for colluding when bidding for contracts; much of the market still considers Kier to be a housebuilder (still not much support for them), and investors are concerned that the Government, of whichever hue, will cut back on projects that Kier would profit from after the next election.

We like Kier, but these factors do temper our urge to buy. Hold and see how the next 12 months pans out.