Securitas – A Turnaround May Finally Be Here (OTCMKTS:SCTBF)

Dear readers/followers,

I’ve been covering the company Securitas AB (OTCPK:SCTBF) (OTCPK:SCTBY) for a number of years, and maintain as of today a continued position in the business that I believe may generate a solid sort of return – at some point. The company’s profitability has been affected, but gross and operating margins are slowly improving. That’s been the trend at least for the past few quarters – and we have some trends and updates which the company reported recently, has seen this improve even further.

In this article, I seek to deconstruct the latest set of news and trends and look at what could be seen from Securitas over the period of the next 3-4 or so years.

The material and news we’re digesting today is the progress since the last investor day – which was back in August of 2022. And while Securitas still has some ways to go, there’s an upside to be had here with the company moving forward.

So without further ado, let’s see what we have here.

Securitas – What upside do we see going into 2024E?

Securitas does require patience from you for investing. While we’re going to show some significant progress that the company has made over the past few months and the last year, there’s still plenty left for the company to do. The creation of the Securitas Technology segment, with the integration of STANLEY, is the biggest set of news for investors at this time.

Also, Securitas is, perhaps also important, seeing improvements across every single segment. This is another good thing. The company is seeing significant growth in technology and solutions and can report some very significant client wins. If possible, I would, of course, elaborate more on what significant clients the company is referring to here, but the fact is that the company has, as of this article, not yet shared the specifics of these clients, beyond their characterization as “significant”. However, some of the company’s significant clients include providing solutions to Linkedin, Microsoft (MSFT), CVS (CVS), and others – so other clients theoretically be in that realm of size and relevance.

The growth in tech pertains to the ever-increasing relevance of technologies in security contexts. Verticals such as industrials, manufacturing, aviation, critical infrastructure, office, retail, and others suffer high losses due to significant threats – and Securitas provides these clients with new and modernized security systems to combat this. The growth the company is seeing can be seen in areas like Video analytics, remote security, more advanced on-site security in construction sites, MobileCams, and the like. All of these markets seem to experience growth, or at least growth with respect to the use of technology as opposed to physical security guards.

Also, the company has made progress on the digitalization front – over 130 000 client sites and, 60 000 officers are now involved. The company is optimizing the entire value chain and is exiting non-core low-performing and stale markets, which I view as a positive.

This should also be viewed from a historical context. About a decade ago, the security market was a place that was primarily about physical guarding. It was very low growth, and relatively low margins, but stable, and a big part of the revenue. This is how things looked at the time.

This has now evolved to guarding slowly shrinking, technology almost doubling, Solutions more than tripling, and the Data-Driven SaaS segment appearing as well, in about the size of the solutions segment or slightly larger. So in less than 15 years, the entire market for the company has shifted slightly.

Client needs are very different today than they were a decade ago.

The plan is to turn Securitas into a world-leading security powerhouse – even more than the company already is today. The company has now left over 10 markets, and cut its employees by almost 30,000 people. The company has moved to a digital model while maintaining its high client retention numbers.

So, what will Securitas be doing?

The company is likely to focus on technology leadership. 21% of group sales in 2023 are aimed at this – with a target of finalizing the integration with hundreds of millions of SEK worth of cost synergies and additional cross-selling upside.

The company’s core security services – the staffed ones, I’m referring to here – are likely to remain the biggest sector, and they continue to represent over or around two-thirds of what the company manages here. Securitas needs to find ways to keep labor costs in check to be sure that cost efficiency here is in a good place, in a world where inflation and increased prices and costs for things seem to be commonplace.

The Company’s focus on solutions is also something to be larger and larger – it’s currently 11% of group sales, and set to grow significantly on a forward basis. Again, cross-selling is a big thing here, and the fact that Securitas has well over 90% client retention is something that will be a major advantage here.

A huge catalyst for the company is reaching a better EBIT margin. Securitas targets that double-digit EBIT margin, and calls this “strategically important” for the business – and this development in margin is expected to come from two areas. SaaS and Digital products. The traditional security services alone, or in addition, cannot achieve this, because margins in these legacy businesses are lower than for the new sectors and businesses. Even with digital introduced and working, it will take time to reach that double-digit margin though – as seems clear by the company’s own messaging.

That being said, I do want to liken this company’s progress to that of a Space Shuttle, given its operating parameters and market. Finding this sort of margin growth, and seeing a path to 8% in a few years, is not something easy here.

So what exactly is going to happen to Securitas that enables this growth?

Well, it’s a mix – unsurprisingly. The company is going to see margin recovery and profitability in Security Services Europe. That’s a big one – coupled with Ibero-America and NA margin recovery as well.

However, the big improvements are coming from the aforementioned digital and SaaS segments. It will, as things are looking right now, become a significantly different mix than we’ve seen with the company before.

And this transformation is currently ongoing.

All that being said, Securitas does not have the greatest track record out there. Given this (yes, I’ll call it somewhat poor here), I wouldn’t take any such estimates with more than a teaspoon of salt – but we can at least confirm that the company has some sort of upside here if the price is low enough. I will say though that in terms of fundamentals and actual business trends, Securitas is in a very solid position and in a place where significant upside could be enjoyed by this business. In my last article, I wrote clearly that we have the investor day in March of 2024. That’s the day we’re reviewing in this article, and what I am basing this article upon.

Risks & Upside

As I have clarified before, the risks for Securitas are mostly on the operational side. That the company has been in a decline for some time in terms of valuation is not something we can argue about – you need only look at the share price development. However, I do believe that a turnaround seems to be happening, but at the same time, I see the visibility here as lower than I’d like for the timing specifically. The timing portion is one of the major risks here.

My overall risk/reward assessment continues to be that at the right price, Securitas provides outperformance potential – and I will defend this assertion in my valuation portion as well to guide you to what I believe is a good valuation for the business.

Securitas – Good valuation, good upside

So, what I have been talking about is going to happen in the coming years – if you’re to believe forecasts. By this I mean the reversion in earnings, and a solid overall upside for the company both from a dividend and from a capital appreciation perspective. The current dividend is not impressive. 3.5% just isn’t that good when even a basic savings account gives you 3.8%. But the upside is significant once Securitas starts growing, and current EPS growth estimates put the company’s growth at an average of 47% for the next 3 years, with the largest reversal this year.

So let me be clear: I’ve already bought my Securitas shares. I own the position I want to own. Now I’m pretty much “waiting” here for the upside to materialize while making a very decent 4%+ yield on my cost basis.

This is what I believe will happen in the next few years.

Or something close to it. Securitas is nowhere near as attractive as when I analyzed it last. In my last article, I spoke of the attraction of below 90 SEK, now we’re at almost 210. My cost basis is close to 88 SEK. You can see why I am a happy investor here.

The company is just below my PT of 110, and I am not raising it as of this particular time. I could raise it to 115 SEK or 120 SEK without raising any eyebrows or overextending what I expect from the business here. But before I do that, I want more clarity on the company’s price/mix evolution – and we haven’t gotten that yet.

But I am convinced that we’ll start seeing the real upside here at this juncture, and for that reason, I’m maintaining my “BUY” here despite the price target being so very close to being realized.

Timing of the upside here is the important thing – I have no doubt it’s coming, but when is the question – and if we go back down to double digits again, then this company would become extremely appealing.

As of this time, analysts consider Securitas to be a “BUY”, echoing my own sentiments with conviction. 11 analysts follow the company, and their targets range from a low of 80 to a high of 160 SEK, with an average of 115 SEK – close to my own heart here. However, it also represents a significant increase in share price targets from the early 2023 level, when the average was almost at 95 SEK – and since then, I would not say that much has happened.

Because not much has happened, the following is my continued thesis for Securitas AB.

Thesis

• There’s a lot to like about the security company Securitas, which is a worldwide known brand and business. The company’s current challenges notwithstanding, I believe long-term investment makes sense at an attractive entry price.
• I have been buying the company at appealing investment prices/levels for over a year, that being below the 95 SEK/share level.
• For the next 12-18 months, the pressure in earnings, inflation, costs, and integration call for this to be a riskier investment. My strategy dictates that I work this differently, and I’ve done so with buy-writes, annualizing over 16% RoR. I keep this stance in my 2024E article update.
• The company is a “BUY”. I give it a long-term PT of 110 SEK/share, but there may be a long time before this is realized.

Remember, I’m all about :

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the mean time.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

While not necessarily cheap any longer, I still view the company as a “BUY” given the overall fundamental trends and quarterly improvements that we’ve been seeing. I therefore say “BUY” here.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.