Private security: A recession-proof industry

17th May 2012

"It's very fragmented with many small companies and one-person firms. It's spread across a number of industries so it is complicated and often difficult to categorise," says Allison Wylde, an academic at London Metropolitan University and one of no more than a handful to analyse the industry.

With budget cuts imposed on the police and military in many countries, non-state commercial bodies can step into the breach, offering a dedicated layer of protection. And that is on top of privatisation which has seen previously public services such as prisons move into private hands.

Security and the fright level

It can be highly profitable – and it only takes the fright level to be heightened, let alone a real attack – for the security industry to hit new highs. And because it deals with fears – most prominent during bear markets – companies tend to be counter-cyclical so they do well when others are struggling.

G4S (part of which was once known as Group 4) updated the market this week with the perhaps unsurprising news that Greece had become the fastest growing European cash handling market. Guarding companies benefit from fears over banks and bank accounts – for Greeks, holding physical euros is a safer bet than cash in the bank which could be turned into new drachmas. And if the euro was to be replaced, then G4S and rivals would see big earnings from the security needed to deliver the new notes and coins.

A Greek business growth story

The extra demand in Greece has more than made up for lower cash handling earnings elsewhere as consumers cut back on purchases – requiring less refilling of ATMs – and firms no longer bank so much overnight as the security costs involved with transporting the money to a deposit taker are greater than the interest earned at today's  ultra low rates.

But it is not just cash handling and Greece which presents the industry with a potential profits bonanza. The constant security scares at the London Olympic site and the fears over the Olympics themselves later this year may be this year's equivalent of the millennium computer bug, but – just as with the year 2000 computer scare – that does not stop the spending.

G4S estimates it has gained £30m from Olympic security in the first quarter and is on track to garner in £150m over the games as a whole.

Security firms beat the index

Rival services and security firm Serco's most recent result show the company increasing pre-tax profits by 11.4% and earnings per share by 14.1%. in 2011. And since the banking crisis erupted in 2008, it has beaten the FTSE100 index by a clear 20% margin.

Outsourcing group Mitie is a relatively new entrant to the security and guarding area. Its "Total Security Management"  allows it "to provide the right mix of security services to keep people, buildings and assets safe." Except for a short period last year, it has consistently outperformed the FTSE 100 index since spring 2007.

And – to prove Wylde's point that you have to search for security situations – shares in Smiths Group have gained thanks to the company's involvement in airport scanners. The group delivers products and services for "threat & contraband detection" as well as medical devices, energy, communications and engineered components markets. The difficulty for investors is to disentangle the strands.

"Surprisingly little is known about this emerging industry. But it is countercyclical and expanding faster than other industries during the current economic downturn," adds Wylde who quotes estimates of "homeland security" as a £200bn a year industry by 2018 as part of a total spend which has already topped the £250bn mark worldwide.

Her initial studies have "uncovered a lack of definition for security and safety together with a state of change in the sector." The investor has to work through "a complex of firms' in a state of flux" with roles ranging from installers of closed-circuit television CCTV through to manned guarding and surveillance to high end technology companies providing biometrics and hardware to the emerging sectors of software as a service and convergence finally the, recruitment, resilience and training organisations.

Controversy is never far away

The security industry is no stranger to controversy – from deaths among migrants in holding centres or deportation to over-zealous guards preventing people taking pictures of buildings visible from public space on "security and anti-terrorism" grounds.

There are questions over the ethical credentials of certain players from the guy with a truncheon-like torch and a nasty-looking dog to some of the biggest firms.  And there can be a crossover between security provision and hardware and military counterparts.

Does the sector play with socially responsible investors?

"SRI managers have not given much thought to this as a generality," says investment analyst Neville White at Ecclesiastical Investment Management.

"We hold shares in Mitie, which was awarded a £27m  contract to manage the Campsfield House immigration removal centre in February 2011, after the previous firm's contract was revoked," he says.  There is a long running "Close Campsfield House" campaign.

"It is the government's responsibility to set standards but the operating company has to have the correct training and procedures in place to ensure dignity and respect. Mitie disclosed insufficiently – G4S told investors more – so we engaged with the chief executive after six months of research earlier this year. We emphasised we saw this as a human rights issue. Mitie initially pleaded government confidentiality but has now promised to be more open with us," he says.

"But," he adds, "Serco would not fit our SRI criteria because of its major Ministry of
Defence contracts. We do not invest in the arms industry so we avoid military involvement as this differs from civilian security."

 

More on Mindful Money:

Why do investors put up with guaranteed to lose bonds?

What does JP Morgan tell us about the US Economy?

How 'global' is this global recession?

To receive our free daily newsletter sign up here.

The Financialist

Leave a Reply

Your email address will not be published. Required fields are marked *