Capita – will it survive?

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Capita – will it survive?

Fallen angel Capita is doing a lot to bring down debt and reorganise its business into something less cumbersome. In the process, it could become an attractive recovery play.

Many observers of this group reckon that it is either going bust or will end up one heck of a lot smaller than it is currently.

On the face of it I would suggest that Capita (LON:CPI) will survive and safely so, but only after some radical surgery to its assets, such as a number of disposals. But the aim is right to do so if it helps to clear outstanding debt, which was £791m at the last year end.

In fact, yesterday £165m of private placement notes matured, they will be repaid and still leave the group with a significant liquidity through its facilities and cashflow.

The recent £56.5m disposal of the group’s Eclipse business will be the forerunner to selling off its Education Software Services operation, which could be worth well over £500m.

Capita is a consulting, digital services and software business, delivering innovative solutions to transform and simplify the links between businesses and customers, governments and citizens.

The group employs some 61,000 people in its various operations, across the UK, Europe, India and South Africa.

Some 91.3% of the group’s £3.67bn revenues are derived in the UK and 8.7% elsewhere.

It has six main segments: customer management; government services; specialist services; people solutions; technology solutions; and software.

Customer management (21.8% group sales) delivers multi-channel customer engagement services, primarily to the telecommunications, retail and utility sectors. It also provides remediation, complaints management and collections services, including TV Licensing.

Government services (21.1% sales) delivers transforming technology-enabled business services, including the operation of large, complex contracts. It also provides support services such as revenues, benefits and back-office processing, IT, HR, finance to local authorities, education and health organisations.

Specialist services (20.2% sales) covers some sixteen businesses, mostly standalone, delivering a range of services, including life insurance, insurance services, mortgage services, collections, Optima, travel and events, Evolvi, real estate, infrastructure, AXELOS, Fera, managed print, hardware reselling and enforcement.

People solutions (13.6% sales) provides a full suite of HR offerings across the employment life cycle, including recruitment process outsourcing, learning process outsourcing, HR service (including payroll), pensions and benefits administration.

Technology solutions (11.7% sales) provides end-to-end enterprise IT services and solutions focused around digital transformation and innovation; core platforms, cloud, hosted and on-premise and services; LAN and WAN connectivity solutions; and professional services – advising and running IT solutions for group customers, testing, data consulting and cybersecurity.

Software (10.2% sales) develops and delivers specialist application software and wider solutions for education, local government, public safety, utilities, transport, consulting, legal and payments.

Whether we know it or not, it is a 100% guarantee that at some time, if not upon multiple occasions, in any one year we all deal with or are ‘handled’ by various of Capita’s tentacle operations.

Every day it helps millions of people, by delivering its innovative solutions.

Outsourcing is effectively the driver of Capita’s business, its very lifeblood.

And that blood must have been contaminated recently by Covid-19 – whose hasn’t?

Since the beginning of the current year the group has been responding to a number of corporate hassles that it had been enduring by putting into effect various cost-saving measures. Whipping down its group debt will be highly beneficial.

The year to end-December 2019 saw group sales at £3.67bn, upon which it lost £62.6m pre-tax.

For the current year, consensus estimates suggest that £3.35bn in revenues could help generate a pre-tax profit of £137m, worth 6.93p in earnings per share.

Next year to end-December 2021 could push sales up to £3.51bn and £200m in profits, giving earnings of 9.57p per share.

The group has a massive 1.67bn shares in issue. The larger holders include RWC Asset Management (14.4%), Investec Wealth (11.6%), Ninety One UK (9.81%), Veritas Asset (6.99%), Schroder Investment (6.05%), River & Mercantile (5.15%), Invesco Asset (4.22%), Marathon Asset (3.88%), and Jupiter Asset (3.21%).

On the consensus estimates the shares at the current 44p look very attractive. Especially so if the group can almost clear off its debt through completion of the Eclipse disposal and selling off the Education business.

I feel that Capita will survive and that its shares will improve in price, they were trading at 185p a week before last Christmas and were jogging along at 150p before the Covid-19 fall off. From a low of 19.8p in late March they have recovered well, peaking recently at 52p before profit-taking chopped them back to the current 44p.

I now set a 66p target price.


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