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Company description (overview, strategy, markets, management)

Prosegur is a security services company. They operate mainly in three
segments : surveillance (including manned guarding), cash in transit, and
technology (including security monitoring and security installation). They
also provide integrated facility services, although focused mainly on
security (e.g. combining manned guarding and alarm systems). They
operate mainly in Western Europe and Latin America, with a focus on
Spain, Brazil and Argentina (in which they hold a leadership position). They
currently operate in 17 countries, and have recently entered new markets
and segments (Australia, India). The company has over 150 thousand
employees, operates over 400 branches and 5000 armored vehicles
globally. Their total number of clients is near 390 thousand, including
24 000 corporate clients, 170 000 medium and small businesses and
200 000 homes

Company History (origin, founder/management, growth, M&A etc.)

The company was founded by Herberto Gut in 1976 in Spain (as a division
of an existing Argentinian company) as a security service company, with a
focus on cash in transit security. After the fall of the Franco regime in 1975,
this type of security service proved very popular. In 1980, they began
expanding by entering Portugal, and after going public on the Madrid stock
exchange in 1987, expanded further, entering Latin America in 1995,
France in 2001 and Asia in 2011. The founding family is still a majority
shareholder (controlling more than 50% with their holding company Gubel).
Helena Revoredo, the widow of the founder, is now the Chairman, and her
son Christian Gut became CEO in 2008.

Business Segments (key regions and product/brands, including

growth and margin in each,)
The company currently operates in three main segments:
o

Surveillance (46% of sales): this includes guarding services, security

consultancy, airport security, security for big events, dynamic
surveillance, geolocation and GPS tracking, protection of goods
transport and mobile control centres etc. This industry has seen
increasing commoditization, and therefore the company has tried to
sell more bundled services in order to provided more value add (and
increase pricing power/reduce costs). Other related services include
Close Protection and Auxiliary Services (including hostesses, events
premise staff, legal assistance, inventory).

Cash in Transit & Cash Management (43% of sales): this includes

traditional transport and processing, planning, cashier personnel
outsourcing or multi-agency, also collection and counting, recycling
of notes etc. They also manage over 74 thousand ATMs worldwide

(which is increasingly outsourced by banks, and includes installation,

forecasting of cash requirements, replenishment and maintenance).
o

Technology (12% of sales): in this business they design, install and

maintain security systems, monitored video systems and intelligent
image processing, access control, anti-intrusion and perimetral
detection systems, automation of buildings and facilities etc. This
segment also includes Alarms and Fire Protection.

The company has 61% of sales (and over 80% of EBIT) in Latam, with
Brazil at 29% of total sales and Argentina area at 19% of group sales.
Europe is about 38% of sales, with Spain at 23% of group sales. This
means that their three biggest markets make up over 70% of sales.
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Market Characteristics (growth, margins, ROCE, Porter):

Look at growth, market share and margins in Brazil, Argentina and Spain.
Look at economics of recently entered markets. Look at potential
acquisitions.
There is limited data of the nature of the Cash in Transit and ATM
management markets. Globally, market share data in Cash in Transit
indicated that Brinks is the leader globally with 19% share is Brinks,
followed by G4S at 15%, Loomis at 12%, Prosegur at 8% and Garda at 4%.
These companies therefore control about 60% of the global market,
making it quite concentrated.
For manned guarding, it should be noted that the business has seen
commoditized pricing for multiple reasons: fragmented supply, increasing
buyer concentration (multinationals), increasing substitutes (alarms
systems), low differentiation and technical complexity means barriers to
entry are low etc. In addition, there are unions (particularly in Spain) for
security guards, which makes cost structure more difficult to deal with.
They have been making efforts to de-commoditize this business by
focusing on certain specializations where security is more essential
(Aviation, Banking, Energy & Utilities, Hospitals, Historical heritage, retail
etc), and outsourcing parts of the business to maintain a flexible cost base.
Cash in Transit, by contrast, seems like a better business. First, it requires a
large capital investment, which acts as a barrier to entry (it requires both
armored vehicles and guards), and there are quite large fixed costs,
making economies of scale important. Relationships are often built over
multiple years (if not decades), which means that switching costs arent
low. The direct threat of substitutes is quite low (although less use of cash
is a longer term risk, but less in EMs). The market is more concentrated
(Prosegur, Brinks, Loomis, Garda etc), and buyers are quite fragmented.
For this reason, margins are much higher in Cash in Transit than manned
guarding.

The technology market attractiveness depends on both the type of

technology (and its complexity) and the market (leadership position,
customer type). In markets where the main customers are individual
homes, and where there are a limited number of companies operating,
then margins are usually attractive, and therefore returns on capital are
higher.
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Competition (market share etc.)

Although they dont give specific data in their annual report, a G4S
presentation indicated that in Latam, Prosegur had 17% share of the
security market, well ahead of Brinks at 10% and G4S at 7%. In a 2012
presentation, the company noted that they have 31% market share in Cash
in Transit in Germany. They also recently acquired ISS cash management
business in India, making them the number 2 player in the market with
28% market share (it was number three behind CMS and Brinks).
When looking at their main competitors, G4S and Securitas, we see that
Prosegur has a better growth profile (with more EM exposure) and a better
Margin and ROCE profile. This is in large part due to 1/ their geographic
exposure and leadership positions and 2/ their segment exposure (they
have higher exposure to higher margin Cash solutions).
G4S: the company has about 35% of sales in EMs and 45% of EBIT. Their
main EM exposure is in Asia Pacific and Africa, with less exposure to Latam,
where Prosegur already has a substantial leadership position. Its difficult
to get a specific segment split because the company groups manned
guarding and security systems together under secure solutions. But
Secure Solutions represents over 80% of sales, with more exposure to the
UK, Continental Europe and N. America (they have over 20% exposure to
developing markets in this business).

Recent news and numbers (guidance/profit warning)

Management has commented that they see no major change to their long
term view, even given recent macro and currency weakness in Brazil. As
such, consensus hasnt taken much weakness into account. In Q3 2014,
Brazil saw organic sales growth of only 3.4% (down from 9.6% in H1), with
other areas in Latam doing better but with trends weakening. By contrast,
Spain and Germany (with +3.8% and +6.5% organic growth) were stronger
than expected.
Overall, it seems like Spain is troughing but will remain quite weak,
Germany is improving (and margin should improve after synergies and
overhead cost management post acquisition). The German business is
quite recent, and because of investment has so far been marginally
profitable. This should start to improve as they gain scale and synergies
come into play, which should be a tailwind for group margins.

The company increased debt by quite a large amount between 2011 to

2012, moving to 646.1 from 360.1 million.
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Valuation and Expected Value (multiples, DCF):

Some of the main risks from a growth and margin standpoint include
Argentina (which is about 35% of group EBIT) and has seen substantial
currency devaluation and political tension. It has been noted that because
removing cash from Argentina has been difficult for a number of years, the
company has invested it in property to avoid further devaluation.
Interestingly, this type of tension could lead to better demand for security
services.

Initial Comment:
Although Prosegur seems like the most attractive security company
medium term, over the shorter term, and particularly this year, two of its
main markets Brazil and Spain (representing around 50% of sales) remain
quite sluggish, with their third largest market suffering from strong
currency devaluation and political turmoil. Overall, this means that results
could be volatile, and consensus may still not have taken this into account
enough.

Key questions and points:

o

Does the company have competitive advantage, if so how,

where and why?:

What are the business key growth drivers?:

What are the main drivers of margin?:

What is the current level of ROCE (also per segment) and

why?

Where are the main risks for organic growth and margin
(geo and product)?

What are some of the recent M&A deals (and multiples):

The company entered the German market in 2011 acquiring

the assets of Heros and subsequently Brinks. They entered
the Australian market in 2013-2014, and recently acquired
Chubb Security. Theyve also recently entered new markets
including Singapore and India via acquisition. The company
also acquired Nordeste, one of the largest cash management
businesses in Brazil, in 2012.

How much Leverage?:

Management?:
4

Other questions:

Inverting my opinion (be critical): What is the downside/worst case

scenario for the different key points, and what happens to growth, margins,
and valuation if it happens?