Stockwatch: scope for this small cap’s share price to treble?
Despite a difficult outlook for the UK economy, capable management should help this company thrive. Analyst Edmond Jackson studies a firm that’s at an inflection point.
30th September 2025 11:52
by Edmond Jackson from interactive investor
Following my analysis of travel/insurance groupSaga (LSE:SAGA), this week has started with a different stock enjoying a similar re-rate of around 20% in response to a broker tip.
The shares are still massively down on where they traded a few years ago, although operations are, as with Saga, said to be at an inflection point.
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Cannacord has issued a 900p price target “with conservative assumptions” for outsourcer Capita (LSE:CPI), which settled at 322p yesterday on a forward price/earnings (PE) of 8.3 times the broader consensus expectation for 2025, easing to 5.8x hopes for 2026. Mind you, these are normalised projections, and in the first half Capita made a £7.4 million reported loss for earnings per share (EPS) of -6.6p, blamed on the implementation of annualised cost savings of £205 million as of 31 July.
The balance sheet remains in poor shape. As of 30 June, there was £432 million financial debt and £625 million lease liabilities, offset by £334 million cash for overall net debt of £723 million relative to £178 million net assets; £457 million of which constituted goodwill/intangibles. With £494 million deferred income as a current liability, the ratio of current assets to current liabilities was 0.67. The £18.3 million interim net finance charge obliterated £9.2 million reported operating profit, although management cites an adjusted figure of £42.6 million, down 22%. Not surprisingly there is no dividend policy.
A parallel therefore exists with Saga in the sense of an indebted balance sheet with questionable asset backing, no yield support, but scope to take radical views as to potential medium-term profit. When a share is also coming off historic lows after a big drop – despite it relating mostly to dilution from at least one rescue equity raise – it is liable to spike. The market mood is currently also buoyant, which helps.
I try not to be overly cynical, as a relatively new and technology-driven CEO, like at Capita, can make a big difference, and small variations in margin on around £2,400 million revenue can impact profit. On a five-year view, and despite sharp sideways volatility, it is starting to look as if a “bowl” chart pattern is forming (again similar to Saga):
Source: TradingView. Past performance is not a guide to future performance.
We have yet, however, to see [how] much material insider buying there is, where yesterday it was declared the buyer of last Friday’s 1.2 million Saga shares at a premium price of 274p was chair Sir Roger De Haan. He now owns 27.53% of the business, so take your view as to whether he’s in love or flagging future upside.
Perhaps Capita does not have insiders with substantial capital to spare. Aside from executives exercising options, cash buying has involved a non-executive director on 15 September spending £13,400 at near 260p. Otherwise, after annual results in March, the CEO of Capita Experience (sub-contracted customer services) bought £44,900 worth at a post-consolidation price equivalent to 188p. So, there has been tacit perception of value.
Why 900p target is not outlandish
Capita’s share price remains well down on levels near 12,000p a decade ago, before early 2018 when a new CEO revealed dire finances after rapid acquisitions (a classic recipe for trouble). More than £1 billion was wiped off the company’s market value in just a day, the dividend was axed and a dilutive £700 million equity raise made. At roughly 1,750p equivalent, the shares then spent years foiling attempts to call a low, which so far appears finally to have been achieved in August at 230p (equivalent to 15p before last April’s 1-for-15 consolidation.
Cannacord’s target is hype if EPS above 50p is achievable in medium-term context. Outsourcing is not going away, the public sector contracts which form Capita’s 62% majority should be quite sticky, and despite growing cynicism at chatbots replacing people in customer service, this ought to be an area where artificial intelligence (AI) can exact efficiencies. Despite a difficult outlook for the UK economy, with capable management Capita ought to be able to thrive.
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As with Saga, however, the market is currently minded to set aside balance sheet risk, which six to 12 months ago weighed on equity value. If the market mood turns debt-averse, say in a recession, such concern could return.
A 900p price appears to assume Capita can achieve EPS more like 60p to 70p, without a huge gap between normalised and reported numbers, where the PE would be more like 15x reducing to 13x. A dilemma is profit and loss varying greatly over recent years and the last interim results implying any share price base remains early in its formation.
Capita - financial summary
Year-end 31 Dec
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
| Turnover (£ million) | 3,679 | 3,325 | 3,183 | 3,015 | 2,815 | 2,422 |
| Operating profit (£m) | 0.4 | -0.6 | 333 | 87.3 | -54.4 | 175 |
| Net profit (£m) | -64.2 | 14.0 | 225 | 74.8 | -178 | 76.7 |
| Operating margin (%) | 0.01 | -0.02 | 10.5 | 2.9 | -1.9 | 7.2 |
| Reported earnings/share (p) | -62.7 | -6.2 | 197 | 65.9 | -159 | 66.1 |
| Normalised earnings/share (p) | 280 | 199 | 200 | 130 | -21.4 | 50.0 |
| Operational cashflow/share (p) | -23.8 | 359 | -159 | 63.4 | -36.0 | -21.7 |
| Capital expenditure/share (p) | 165 | 79.2 | 51.7 | 42.2 | 55.0 | 43.2 |
| Free cashflow/share (p) | -189 | 280 | -211 | 21.2 | -90.9 | -64.9 |
| Return on total capital (%) | 0.02 | -0.04 | 29.1 | 8.4 | -6.8 | 22.6 |
| Cash (£m) | 409 | 461 | 318 | 397 | 155 | 254 |
| Net debt (£m) | 1,431 | 1,143 | 923 | 507 | 566 | 426 |
| Net assets (£m) | -127 | -134 | 275 | 330 | 113 | 200 |
| Net assets per share (p) | -114 | -121 | 244 | 294 | 99.6 | 176 |
Source: company accounts.
Green shoots in a messy garden
March’s full-year results had guided for 2025 adjusted revenue to be broadly in line with 2024, with growth in public services and pensions offset by declines elsewhere. Despite a £55 million cash outflow to deliver cost reductions, the group was to turn free cash flow positive from end-2025
Interim adjusted revenue actually eased 6% to £1,155 million, but was still guided flat for the full year, with mid-single-digit growth from the public sector offset by a mid-teen reduction on the contact centre side.
Operating margins were 0.8%, or 3.7% on an adjusted basis, but from the interim income statement it was tricky to discern which costs (within sales and administrative expenses) should reasonably be treated as exceptional. Like with so many businesses currently, it appears costs have risen, hence even if they look nominally lower they are up as a percentage of lower revenue. Such is the dilemma of “stagflation”.
Despite net finance costs down 17%, they still whacked operating profit, and it is early to consider when cash flow could reduce debt.
The bright spot was public services operating profit up 21% to £57.2 million on revenue up 4% to £711.8 million, but the contact centre business saw a 20% drop to £277.4 million revenue and an £11.4 million loss. Loss of telecoms business was cited but also cost savings from offshoring to India and South Africa, yet it was my understanding that BT Group (LSE:BT.A), for example, re-focused on UK call centres specifically to improve the customer experience. AI improvements, as incorporated into the launch of AgentSuite in 2024, are said to offer customer benefits, but the evidence seems yet to manifest in sales.
While public services enjoyed a 53% leap in first-half contracts won to £796 million, reduced bidding from the contact-centre side saw deal value drop 48% to £172 million. At least Capita was net ahead from these principal divisions.
Pensions solutions (administering defined benefit schemes) saw a 15% profit decline to £9.7 million on flat £86 million revenue, but contracts won jumped from £40 million to over £75 million. A similar “regulated services” operation saw an 80% profit slump to just £2.5 million on flat £80 million revenue, albeit due to an exceptional benefit in the first half of 2024.
Management emphasises a 17% overall increase in total contract value driven by 53% in public services, although adjusted revenue for 2025 as a whole was still expected to be flat, with contact-centre revenue reduction offsetting this growth.
Last year, there was no further update until 17 December when the CEO had to cite larger-than-expected headwinds but was “encouraged by customer reaction to our suite of AI solutions...which will help to drive profitable revenue momentum from 2025 onwards”. That now shows him as over-optimistic, at least on the contact-centre side.
Momentum may continue if risk appetite does
Capita is trading slightly stronger at 325p this morning, as is Saga at 277p (versus 245p when I covered them last week). Both are enjoying public conviction as recovery plays, Capita based on public services and hopes for its pension services, and for Saga there’s optimism about another cruise ship despite difficulty in projecting the profit upshot from the Ageas partnership. Both companies will remain taxed by debt, although Saga might reduce it quicker.
Of the two, I tend to favour Saga, but Canaccord is right to draw attention to how Capita is at an inflection point. I believe a speculative position can be justified, although an investment rating has to be “hold” until the business can further de-risk.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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