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Capita grows through acquisition

The outsourcing group has been busy making bolt-on acquisitions since reporting half-year results in July, and has just announced a contract extension with the Criminal Records Bureau
September 16, 2011

What's new:

■ Acquired AIB International Financial Services
■ Contract extension with the Criminal Records Bureau
■ Acquired pension business of NorthgateArinso

IC TIP: Buy at 700p

Outsourcing group Capita has been busy expanding its business by making some attractive bolt-on acquisitions since reporting half-year results in July. The group's pensions business has been bolstered with the £27.5m acquisition of pension administration and software company NorthgateArinso, which is a good fit with the existing operation and comes with a blue-chip client base of Aviva, Boots and Rentokil.

Capita has also acquired AIB International Financial Services, a provider of administration and treasury management functions to financial institutions and other corporates, for £29m. Paul Pindar, chief executive, said the deal was an "excellent strategic fit" and, given that AIB generated operating profit of £6.2m on revenues of £24m in 2010, it's a very profitable one, too.

There has also been progress on bolstering the £4.7bn bid pipeline, which Mr Pindar highlighted in the half-year results, with the 12-month extension of the Criminal Records Bureau contract. Decisions are expected on 15 bids Capita is involved in this year, so expect more newsflow on this front. Mr Pindar also announced that Capita will be expanding into the high-growth Polish market by opening a shared services business centre. This global diversification can only help create a more balanced earnings stream.

Panmure Gordon says...

Buy. We maintain our recommendation, reflecting our continued view that Capita will emerge as a key winner from greater levels of outsourcing in the longer term. Life and pensions in Europe, coupled with central government, will remain key areas, specifically Edinburgh Council, Army Recruitment and Civil Service Pensions. While there remain questions over whether Capita can deliver 2012 forecasts, we think it will grind out on the earnings front through further margin expansion and enhancing acquisitions. However, a significant share price move is unlikely until there are clear signs that organic growth has turned the corner. Expect 2011 EPS of 48.5p, up from 44.5p in 2010.

Seymour Pierce says...

Buy. We are increasingly confident that there will be a turnaround in Capita's fortunes, with public sector outsourcing activity picking up. The bid pipeline looks healthy, increasing from £3.7bn to £4.7bn, with £1.1bn of major contracts secured in the first half of this year alone - double the amount recorded in the same period last year. We are maintaining our full-year pre-tax profit and EPS estimates at £408m and 51p, respectively, and are pencilling in 10 per cent profit and earnings growth in 2012. We have a target price of 770p.