A look at the security services sector
The JSE s surprisingly small security services sector is in lockdown when it comes to investor sentiment even though high levels of crime and social unrest in SA mean private protection is arguably one of the few sweet spots in the local economy. There have been persistent mutterings that large security services conglomerate Fidelity could come to the market, but any enthusiasm for this listing might be muted by the prevailing ratings on existing security-aligned counters. CSG Holdings, which has security as part of a services and outsourcing services bouquet, trades on a trailing earnings multiple of less than seven times. Security-barrier specialist Trellidor, which boasts cash flows that can sustain generous dividends, trades on an earnings multiple of about nine times.
Amalgamated Electronic Corp, which specialises in electronic security technology, was bought out by Stellar Capital Partners last year at a price that seriously discounted the company s perennial profits and its longer-term potential. Back in the late 1990s, the JSE hosted a vibrant private security sector with listings such as Sentry Group, Paramed and Gray Security. However, these companies delisted as consolidation among the bigger players transpired. Should a big player like Fidelity confirm plans to list in the medium term, it is possible that sentiment might fortify, to an extent, around CSG and Trellidor.
Both companies have been acquisitive, and both have the capacity and scope to snag further deals to bulk up their security offerings. Last year Trellidor snapped up a controlling stake in the Taylor Group, which specialises in shutters, blinds and decorative mouldings. At the interim stage (to end-December) Taylor looked well capable of achieving its warranted profit after tax (before interest) of R33m, with R23m (off turnover of R119m) already in the bag. Encouragingly, the 19% operating margin at Taylor is not too far off Trellidor s well-reinforced 21%.
Aside from its cautious African and global expansion international sales now account for more than 16% of Trellidor sales the acquisition of Taylor establishes a platform for growth into a new segment of the market, in which distribution synergies can be leveraged. Trellidor, no doubt, will also expand the Taylor product range with some vigour and full-year results to end-June will hopefully show early evidence of this effort. While there are clearly more niche acquisitions that Trellidor could pursue, the Taylor deal is a significant transaction and might mean the company prefers to retain an inward focus for the foreseeable future.
But there should be safety in Trellidor s numbers, with solid earnings growth and an escalating dividend keeping investors insulated in recessionary times. On the other hand, at CSG, investors can pretty much bank on further corporate manoeuvres. The company has made several acquisitions in the security sector over the past two years Stallion and Revert Risk Management Solutions are the most recent and there are indications that further deals are afoot. CSG has indicated it prefers security operations with a technology edge and wants to operate in sectors in which there are high barriers to entry.
Its security offering currently entails guarding (armed and unarmed), CCTV monitoring, specialised security services, monitoring and armed response, as well as safety surveillance and access control. Security already makes up 14% of CSG s operating profits, chipping in R20m in the year to end-March. With Stallion and Revert Risk on board, security services could account for more than a quarter of CSG s operating profits in the next financial year.
CSG s recent investment presentation showed that more than three-quarters of the nearly R50bn private security sector is still in the hands of small (presumably regional) players. About 20% is controlled by big players like Fidelity, Bidvest Protea Coin, G4S, Servest Security and Thorburn. CSG holds a market share of roughly 0.85%. Naturally, it will be a cumbersome and prolonged process for CSG to build critical mass in the security sector by snapping up small “mom and pop” security businesses. Investors at this point need to mull the possibility of CSG tilting at a large, game-changing acquisition in the security sector.
With the adventurous PSG Group and Afrigem, an offshoot of Patrice Motsepe s African Rainbow Capital (ARC), ranking as influential shareholders at CSG, the possibility of locking in a big deal hardly seems far-fetched. PSG and ARC could well bolster their equity positions if inspired corporate action unfolds. Of course, CSG which is a dogged dividend payer might be averse to raising fresh capital for a sizeable transaction with its share price slapped with a modest market rating.