Capita plugs the gaps

Outsourcing has not been the panacea that many had expected as tougher market conditions, chronically underperforming contracts and higher costs combined to undercut the investment case for the sector. Against that backdrop, it has often seemed the sole reason for Capita (CPI) to stay in business simply to pay off its debts and plug the yawning gap in its defined benefit pension schemes.

On the evidence of these results, these minimalist goals have been achieved with a measure of success; the company has paid off £1.7bn of debt to date since 2018, based on flogging off most of its saleable assets. There were five more business either sold or put up for sale as the half ended – a trading period in which the company mostly attracted attention for the cyber attack that saw it incur exceptional costs of £21.8mn.

The sale of businesses triggered extra payments in the pension scheme, which is why these contributions doubled in the half to £30mn. However, there should be a steady reduction in net contributions for now on as part of the actuarial agreement reached in 2020 with the scheme’s trustees; this preceded the scheme moving into reported surplus on the back of higher interest rates. Combined, this should ease the burden on cash flow as the year progresses. Indeed, management spoke of a return to dividends over the medium term if the improvement continues.

Capita deserves kudos for surviving a combined debt and pension squeeze, even if it is left in a much-diminished state. Now really a penny share, and with asset sales ongoing, shareholder value will not be rebuilt quickly. Sell.

Last IC View: Sell, 36.5p 6 Aug 2021