ii view: Capita shares plunge on growth fears

Parts of the business have done well, but growth in key areas give cause for concern. We assess prospects for this outsourcer following a downbeat update.

Trading update for the 11 months to 30 November

• Overall revenue up 0.6% to £2.88 billion
• Public sector related revenue up 11% to £1.29 billion
• Experience or private sector revenue down 8% to £1.08 billion
• Non-core business revenues up 0.4% to £507 million

Chief executive Jon Lewis said:

“We have continued in recent months to make progress with our corporate transformation, particularly in our Public Service division.  However, Covid has continued to impact some businesses within our Portfolio division. This, combined with the anticipated revenue attrition in our Experience division has slowed the overall rate of top line growth this year.

“We have established the foundations for future long term sustainable revenue growth. We continue to expect the Group to generate sustainable free cash flow in 2022.”

ii round-up:

Outsourcing company Capita (LSE:CPI) today flagged an ongoing hinderance from the pandemic, with revenues for the 11 months to the 30 November growing by just 0.6% to £2.88 billion. That's much less than the City expected.

Sales for it potentially up-for-sale non-core divisional businesses rose by 0.4% to £507 million, held back by travel and events related activities. Revenue for its Experience or private sector related division fell by 8% to over one billion. 

Capita shares fell by over 20% at one stage in UK trading, leaving them down by around 18% over the last year. Shares for rival outsourcer Serco (LSE:SRP) are up by around 15% over that time. 

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

Earlier this year it outlined plans to simplify its divisional structure from six to the current three divisions and sell £700 million of assets under the next phase of its recovery plan. Disposals now total £620 million this year with net debt at the year-end expected to be in line with management’s forecast at just under £900 million.

The fall in revenue at its Experience or private sector division came as it suffered challenges for its outsourced Life and Pensions contracts. 

Public sector sales grew by 11% to £1.29 billion, driven by Royal Navy training and recent new contract wins and renewals with HMRC, the Standards and Testing Agency, and the Ministry of Justice.

ii view:

Capita is a major provider of business services, largely within the UK. It now operates across the three divisions of Public Service, private sector or Experience and non-core Portfolio. Employing around 55,000 people, its customers include sectors such as financial services, law firms, school property management, Royal Navy training, 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 fundraising has helped to reduce debt along with its ongoing business disposal programme. 

For investors, revenue gains for the public sector-focused division are not to be overlooked, and the establishment of a non-core business division should help management increase focus on the remaining core operations. However, for now, and in the face of pandemic headwinds, Capita has fallen well short of what's expected. Capita has struggled over the summer to hold onto share price gains and, while some might see today's sharp decline as a buying opportunity, there are concerns that the recovery has come off the rails. More cautious investors are likely to wait for clear evidence of a lasting turnaround before dipping in. 

Positives: 

• Public sector related revenue up
• Expects to generate sustainable free cash flow in 2022

Negatives:

• Suffering pandemic headwinds
• No dividend payments

The average rating of stock market analysts:

Strong hold