Interactive Investor

Insider: mid-cap chiefs buy shares after price crash

20th December 2021 09:50

Graeme Evans from interactive investor

A restructuring plan is a real rollercoaster at this £600 million firm, but now’s the time to buy, reckon two top dogs. Directors are also buying at easyJet and Rolls-Royce.

More stock market frustration over the protracted Capita (LSE:CPI) turnaround story has been followed by chief executive Jon Lewis buying more shares in the FTSE 250-listed company.

The former Amec Foster Wheeler boss, who is entering the fourth year of his restructuring plan, made the £121,000 swoop after the value of the outsourcing firm tumbled at the start of last week. It was his first major purchase since March 2020 and was at a price of 36.7p, compared with more than 400p prior to the start of the company's balance sheet crisis in 2017.

Sir Ian Powell, who has been chairman for five years, also bought shares at 35p for a total investment worth £25,000 in the hours after Capita's end-of-year update.

While the top two in the boardroom have faith in the turnaround strategy, confidence in the City has wobbled judging by last week's 16% share slide to near their lowest level of the year.

Capita, which manages the London congestion charging scheme and collects the TV Licence on behalf of the BBC, needed an emergency £700 million rights issue in 2018 to cut debt. It is now on track for its first revenues growth in six years when it delivers 2021 results in March.

But growth of 0.6% in the first 11 months of the year was clouded in last week's update by Capita revealing the impact of Covid on businesses in its non-core Portfolio division, such as business travel portal Agiito.

There has been much stronger progress within Capita Public Service, where revenues jumped by 11% to £1.3 billion, driven by Royal Navy training work as well as recent new contract wins and renewals with HMRC, the Standards and Testing Agency, and the Ministry of Justice.

Revenues declined 8% at Capita's consumer experience business, following previously announced contract losses caused by client corporate actions. The division, which is at an earlier stage in its turnaround, has won and extended contracts with the RSPCA, a major UK bank and a FTSE 100 pensions client.

Capita, which unveiled a new operational structure in March, is also within £80 million of its target for disposals of £700 million by next summer. It is now built around two core growth divisions - Capita Public Service and Capita Experience - and a third division, Capita Portfolio, which contains its non-core businesses.

Lewis said: “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.”

Despite his optimism, shares were hit by some disappointment over the pace of revenues growth and a warning about inflationary pressures caused by the tight labour market.

Barclays analyst Paul Sullivan cut his adjusted profits forecast for this year by 17% and for 2022 by £40 million or 22%. He said the key pillars of the recovery are in place, such as revenues growth and the proceeds from disposals, although he admitted it “isn't all plain sailing”.

Sullivan added: “Capita remains a complex restructuring story but is making progress. Cash inflection next year is a catalyst as will be the final exit from non-core businesses.”

Barclays has a price target of 80p, noting that a 2022 projected earnings multiple of seven times failed to take into account the deleveraging and operational improvement.

Bosses believe direction of travel is up

Directors at easyJet (LSE:EZJ), Rolls-Royce (LSE:RR.) and Upper Crust railway caterer SSP (LSE:SSPG) have bought shares in their respective companies during another difficult week for the travel-focused sector.

Their long-term backing comes with share prices continuing to be weighed down by the impact of disruption caused by travel restrictions relating to the new Omicron variant.

Kenton Jarvis, the chief financial officer at easyJet, bought shares worth £75,000 at a price of 493p on Thursday. The stock rallied on Friday to close the week at 509p, but is still well down on the level above 700p seen as recently as early October.

Rolls-Royce's new chairwoman Anita Frew took the opportunity last Monday to buy another 80,000 shares in a purchase worth £95,000. The shares were priced at 119p compared with 147p in November, but the FTSE 100 engines giant closed another difficult week at 114.3p.

SSP non-executive director Carolyn Bradley spent almost £40,000 on shares on Tuesday, when the FTSE 250-listed stock was trading at 220.84p. The FTSE 250-listed company, which operates more than 2,800 catering and retail units at 180 airports and 300 railway stations worldwide, finished the week at 223.4p compared with 256p prior to Omicron sell-off.

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