ii view: Capita details next phase of its recovery plan

by Keith Bowman from interactive investor |

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It's targeting a first year of organic revenue growth for six years. Buy, sell or hold?

Full-year results to 31 December 2020

Chief executive Jon Lewis said:

“I’m pleased with our robust response to the Covid-19 crisis and the challenges of 2020, protecting our business, client services and – most importantly – our people, whom I would like to thank for their hard work and commitment.

“Despite the challenges, we have continued to make good progress, improving client relationships and winning significant new contracts. Capita is a much better business than it was three years ago when we began our transformation.”

ii round-up:

Outsourcing company Capita (LSE:CPI) today outlined plans to simplify its divisional structure and sell £700 million of assets under the next phase of its recovery plan. 

The current six divisions will be transformed into two core divisions and one non-core collection of businesses from which disposals will be made. 

Capita shares rose by more than 5% in UK trading, leaving them up by more than 40% over the last year, although still down by more than 85% over the last ten years. Shares for rival outsourcer Serco (LSE:SRP) have endured a similar volatile time over recent years as it too has battled non-competitive contracts and undertaken a recovery plan. 

Capita provides a combination of both digital and consulting services to companies, local authorities and the government, largely in the UK.

Targeted modest revenue growth under ongoing management recovery plans during 2020 was thwarted by additional challenges created by Covid-19. Total revenues fell by 10% to £3.32 billion and a further pre-tax loss of £49.4 million was made, although better than the £62.6 million loss generated in 2019.

However, despite a national lockdown through the current first quarter, Capita continues to target its first year of organic revenue growth for six years. It hopes to make £500 million of the planned £700 million asset and business disposals in 2021. 

It remains focused on building a more focused, client-centric and streamlined business, in order to deliver improving returns to shareholders. The planned new simpler structure supports its ambition for sustainable cash generation come 2022.

Improving profitability and cash from trading operations will near term be offset by a reversal of VAT savings, pension commitments and significant ongoing restructuring charges. 

ii view:

Capita is a major provider of business services, largely within the UK. It currently operates across the six divisions of software, technology solutions, people solutions, customer management, government services and specialist services. Employing over 60,000 people, its customers include sectors such financial services, law firms, school property management, British Army recruitment, utility companies, government health IT and services for the police. 

An ongoing multi-year transformation plan aims to simplify and strengthen the business, fix legacy issues, rebuild trust with clients, take out costs, reduce risk, and invest in growth. A previous £1.1 billion fund raising and business disposal programme helped reduce debt. Which has fallen over this latest financial year by a fifth to just over £1 billion. 

For investors, further plans to reorganise and continue the company’s hoped for recovery plan are to be welcomed. The establishment of a non-core business division should help management increase focus on the remaining core operations. A current analyst fair value target of 58p per share offers longer term optimism. But for now, and in the face of the ongoing pandemic, many key metrics are yet to show recovery, with more cautious investors potentially waiting for a convincing turnaround. 

Positives: 

  • Net debt reduced
  • Achieved positive free cashflow

Negatives:

  • Yet to achieve organic revenue growth
  • No dividend payments

The average rating of stock market analysts:

Strong hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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