What's new:
■ Bid pipeline up 19 per cent to £4.4bn
■ First half adjusted pre-tax profits up 15 per cent
■ Dividend raised 18 per cent
The UK's largest outsourcer, Capita, released a very upbeat half-year statement this week, despite the looming spectre of government spending cuts and pressures on suppliers to cut prices.
The group's chief executive Paul Pindar said demand for outsourcing across both the private and public sectors has been "buoyant," with the bid pipeline surging from £3.7bn in February to £4.4bn. An "unusually high" level of contract completions and lower client expenditure on project activity did limit organic revenue growth, but profit before one-off costs and tax was up 15 per cent to £163m, on turnover 4 per cent higher at £1.36bn.
The size of contracts won in the first half was down year-on-year, with 17 new contracts and extensions worth £523m secured, compared with 10 contracts worth £814m in the same period in 2009. Local government and life providers continue to be the largest revenue streams, demonstrated by contracts with Harrow Council and Aviva Life International in Ireland. But Capita did say back in February that deals this year would be back-ended, mainly due to election uncertainty and the financial crisis.
Underlying operating cash flow rose by 9 per cent to £216m which has helped to fund seven acquisitions so far this year, at a cost of £107m, and a hefty 18 per cent hike in the interim dividend to 6.6p (ex-dividend: 1 Sep).
KBC Peel Hunt says…
Buy. The interim results show a good level of contract wins and renewals in the first half, and we are encouraged by the strength of the bid pipeline. We believe the long-term opportunity for outsourcing in central government and in the health sector is significant and that Capita will be a key beneficiary. A small number of trading activities could potentially be affected by public spending pressures in the short term and the stock is likely to remain volatile at least until the spending review in October. Investors should use any weakness as a buying opportunity.
Numis Securities says...
Add. These interim figures should re-assure investors that the Capita model is still providing double-digit earnings growth. Organic revenue growth was non-existent, as expected, due to an exceptional level of contract attritions, but the bid pipeline has grown by 19 per cent since February which is significantly better than expected and should support growth in 2011 and beyond, as well as silence the doubters over outsourcing opportunities. We have increased our full-year adjusted pre-tax profit forecast from £366m to £378m and raised our EPS estimates from 43.1p to 45p.
