G4S gains on Jefferies upgrade

(ShareCast News) - G4S shares gained on Thursday after Jefferies upgraded the security services company to 'hold' from 'underperform' and raised the target price to 235p from 160p.Jefferies said while the disposal proceeds from the sale of the group's Utility Services business to First Reserve disappointed, it should help management achieve its target of raising £250m and £350m through its plans to offload less profitable parts of the business.G4S last week announced the sale of Utility Services to the private equity and infrastructure investment firm for £52m.Earlier in December G4S also agreed the sale of its Israeli business to local private equity firm FIMI Opportunity Funds for £88m."Although Israel was in line with our fair value estimate, consideration for Utility Services was a disappointing £52m and aggregate disposal proceeds may now only just edge into the bottom half of management's £250-350m target range," Jefferies said."Nevertheless, foreign exchange tailwinds have increased so net debt to earnings before interest, tax, depreciation and amortisation should edge below 2.5x by December 2017."Jefferies added that it thinks trading momentum will remain "robust" in the US and in Europe. The broker said security employment picked up modestly in 2016 but wage inflation accelerated sharply, creating "gross margin uncertainty"."This augurs well for fiscal year 2017 revenue momentum but we are more cautious regarding gross margins as higher costs are not always passed through immediately during periods of accelerating inflation, and State/Federal Unemployment Insurance rates are approaching cycle lows so this tailwind may fade."Jefferies said risks for G4S include political changes, delayed bid timetables, contract mobilisation and dislocation in some emerging market countries as global carry trades unwind.Shares rose 2.58% to 238.40p at 0907 GMT.