Capita sells the silver

Ever-shrinking outsourcer Capita (CPI) enjoyed a reasonable half compared with its usual dreadful standards. The results were flattered by £536m of disposals in the half – management aims to have completed £700m of sales by this time next year – after the initial impact of the pandemic threw its timetable into disarray. That effect seems to have partially unwound and the company expects to finally see sustainable free cash flow in 2022.

Part of the problem is that Capita is simply bleeding cash. This year cash outflows are forecast to be £340m related to pension payments and restructuring costs, around £300m of which is expected to reverse in 2022. Clearly, that situation can’t continue, especially as the reason for the asset fire sale is that Capita is fast running up against a wall of maturing short-term debt – over £440m falls due this year and next. To keep up, Capita must achieve its disposals target.

Making a quantifiable assessment of Capita’s position is virtually impossible until it completes its disposal program and investors get a close look at the company then performs on an operational level. The balance sheet is flashing a dangerous current ratio of 0.5, implying it is not producing the cash to meet its current liabilities. The problem with Capita, and most other outsourcers, is that their assumptions on government spending have been proved consistently wrong, leading them to take on troublesome and underperforming contracts in a dash for revenue yield. With the covid-19 bill coming in for state spending, the odds against Capita being caught in the ensuing blow-back are evens at best. Sell.

Last IC view: Sell, 32.5p, 18 Aug 2020