Jefferies has reiterated its 'hold' rating and 275p target price for security giant G4S ahead of the firm's first reputation test since the contract issues with the Olympics hit the firm.

"The award of some UK prison outsourcing contracts next week will be G4S's first litmus test of post-Olympics reputational damage," the broker said on Tuesday morning.

Nine prisons are being bid as six lots and with the exception of Wolds (where G4S is incumbent), all are currently operated by the public sector, the broker said. Shortlisted bidders include G4S, Serco, MTC/Amey, MITIE, Sodexo and Interserve.

Jefferies reckons that the market will be disappointed with none or just one win, two would be more in line with expectations, while three to four would be "encouraging evidence that Olympics-related reputational issues have not impaired its growth potential."

Meanwhile, the broker noted that police outsourcing developments continue to provide a concerns: "We continue to believe that this area is potentially vulnerable as the election process for PCCs [Police and Crime Commisioners] (who need to sign off proposals) this November has become partisan in nature with many Labour/Lib Dem candidates canvassing on a 'no outsourcing' platform".

As for the Olympics issues, Jefferies says that "rehabilitation" is likely to take some time and the stock's valuation multiple will be subdued by fears that these problems may impair earnings per share (EPS) growth.

"If G4S survives the next few months relatively unscathed and confidence in FY 13E EPS growth can be restored, the [price-to-earnings] multiple could recover to the 11-13x range that was more typical of 2010 and the first half of 2011. Under this scenario, a 300-325p share price could be justified."

By 11:10, shares were down 2.03% at 255.4p.

BC

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