Westminster Group (WSG.L) is a specialist global security group supplying managed services and technology worldwide via an international network of offices and agents. This note focuses on its Managed Services Division, and explains the activities of the business, how it earns profit and how the division should become an increasingly important part of the group, as it captures share in a global market.
Opportunity: The note identifies the scale of the opportunity for the Managed Services business, which has a pipeline of prospects representing a large multiple of its existing sales (sub-$5m). Although this is currently just a pipeline, even if only a small part comes to fruition, the contract value achieved could reach in excess of $100m of lifetime revenues and potentially significantly more, resulting in a steady and visible annual dividend stream to the parent.
To date, the company has been highly successful in generating sales prospects and entering detailed discussions with clients, but the translation into firm contracts has been slow as it deals with Governments and the inevitable bureaucracy. The timeline on realisation of opportunities remains inherently difficult to judge, but as the company begins to achieve contract wins, there is scope for the market to change significantly its attitude to Westminster Group shares.
The business is of course not without risks. Operating in areas like West Africa brings significant political, security, legal and other risks apart from the execution risks inherent in any such contract. These can be particularly acute in some of the geographical regions the group is addressing. This was evident to investors with the operational issues caused by the Ebola outbreak which created a significant financial setback for the division in the last 12 months. Management’s handling of the crisis has enhanced its reputation locally. That crisis is now thankfully ending and passenger volumes are staring to recover, which should feed through to earnings and cash flows. Westminster’s strategy is to diversify geographically, thereby reducing its exposure to such local risks.
There are significant opportunities available to Westminster. The financial characteristics of the Managed Services business are unusual in that they provide a very long term cash flow profile with limited incremental capital requirement. This should attract a reasonable valuation, subject to the specific risks of geography, politics and related issues in the contract portfolio.