Capita at the top of its game

Recent full-year results revealed that Capita has hit its highest ever contract win rate, securing two-thirds by value of all the contracts it has gone for. One notable win last year was the £400m electronic tagging contract, which was handed to Capita having been stripped from disgraced rivals G4S and Serco. Capita also secured its second-largest ever contract win in 2013 - a mega £1.2bn 10-year customer management contract with Telefonica. That is only dwarfed by a £1.7bn contract to create an educational joint venture with Staffordshire County Council secured in 2012.

Capita said at its results in February that its bid pipeline, which contains contracts where the group has been short-listed to the last four or fewer bidders, stood at £5.5bn. That's up by almost a third since November and suggests contract win momentum should be maintained this year. Indeed, Capita has announced two key contract wins just in the last month. The group fought off competition from Serco to become preferred bidder for the £400m Defence Infrastructure Organisation (DIO) contract with the Ministry of Defence (MoD) to manage the UK's 230,000 hectare defence estate of training facilities and barracks. Capita also announced a £94m contract with retailer John Lewis to provide an online contact centre.

The robust rate of contract wins and large pipeline of opportunities suggests the outsourcing market remains buoyant, driven by a need to cut costs. Analysts at JPMorgan said the DIO contract was "a good example of how budget pressure is leading departments such as the MoD to turn to the private sector to find cost savings". Obviously, working with the government brings political risk. Serco and G4S are testament to the intense scrutiny that comes with being paid with taxpayers' money. But so far at least, Capita appears to have avoided the pitfalls. The looming general election in 2015 does introduce an element of uncertainty. But any delay in the award of government outsourcing contracts is likely to be short-lived. A labour government is likely to find, just as the current government has, that outsourcing saves it money. That leaves Capita, as the least controversial of the big three outsourcers, looking well-placed.

One concern is that bigger contracts will boost revenue but could depress profitability as the costs of implementation weigh. At the first-half results in July, it appeared that these fears were well founded when Capita said operating margins would be in the 12.5-13.5 per cent range going forward, down from the almost 14 per cent achieved in 2012. But when Capita reported full-year figures in February, there was better news. The operating margin came in at the top-end of company guidance at 13.4 per cent. While it may seem petty to quibble over a few basis points, this was importance because it built trust in Capita's ability to deliver large contracts and to manage the City's expectations.

That top-end margin performance, together with strong contract win momentum, helped Capita deliver 2013 profit ahead of market expectations, leading to 2014 earning forecast upgrades of around 3 per cent. The 2013 results were the last presided over by long-standing chief executive Paul Pindar, who left in March. But the management transition should be smooth given succession plans have been in place for some time - deputy chief executive Andy Parker, who has been with Capita for 13 years, has taken the reins.