When chief executive Jonathan Lewis originally outlined the problems with Capita (CPI), he said what was on many investors' minds; it was too complex, too short term, and lacking in operational discipline and financial flexibility. However, naming these problems is far easier than fixing them. Even as a disciplined programme of non-core disposals, investment in the core business (specifically technology) and improving efficiency sounds sensible, the group does not expect it to lead to organic growth until 2020. Indeed, management expects sales growth to weaken in the second half of the year.
This is not to say the strategy is being poorly executed. Management previously expected to raise £300m from disposals in 2018, but has increased this to £416m. A wide range of technology investments have been approved and efficiency savings remain on track for £70m this year and £175m by 2020. Underlying free cash flow remains a concern, however, with an outflow of £152m, but management said the group remains on track for sustainable free cash of £200m by 2020. None of this proved sufficient to reassure investors, so the shares were marked down following the announcement.
Citi is forecasting pre-tax profits of £275m in 2018, giving EPS of 12.6 (from £383m and 27.7p previously).
CAPITA (CPI) | ||||
ORD PRICE: | 144p | MARKET VALUE: | £2.39bn | |
TOUCH: | 143.6-144p | 12-MONTH HIGH: | 416p | LOW: 78p |
DIVIDEND YIELD: | nil | PE RATIO: | na | |
NET ASSET VALUE: | * | NET DEBT: | £730m |
Half-year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2017 | 2.13 | 27.6 | -0.07 | 11.1 |
2018 | 2.01 | 42.3 | 4.86 | nil |
% change | -5 | +53 | - | - |
Ex-div: | na | |||
Payment: | na | |||
*Negative shareholder funds |