The delayed turnaround at Capita has started with a return to the black and the promise of rising revenues by the end of the year.
Three and a half years into a programme led by Jon Lewis, the chief executive, it reported comparable first-half profits of £45 million on flat revenues of £1.6 billion, bouncing back from an £11 million loss last time.
However, Capita’s efforts are very much a work in progress, in the eyes of the City. Though the outsourcer’s shares jumped by 11.3 per cent, or 4p, to 40p after the results were published yesterday, they remain less than a tenth of their value when the business was an investor darling. Now valued at only £600 million or so, the company’s shares are changing hands for not much higher than six times this year’s earnings, a historical low.
Net debt has been cut by forced disposals to £894 million from £1.1 billion, but remains high because of pension funding catch-up payments, restructuring costs and £105 million of unpaid VAT during the pandemic.
“These results are evidence of delivery on our strategies,” said Lewis, 59, who started at Capita with a £700 million rescue rights issue from which the shares failed to recover as Covid-19 strangled the economy. “We are seeing increasing revenues, profits and margins, and contract wins. We have removed balance-sheet risk and have sufficient liquidity to meet our debt obligations.”
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Capita remains one of the government’s favourite contractors and IT services providers, with annualised revenues of £1.4 billion from the public purse. Of £2.5 billion of new contracts the group has booked this year, £925 million has come from a training contract for the Royal Navy and Royal Marines — a big win for it financially and reputationally because of its previous problems with its recruitment contract for the army.
“We had already reported the green shoots of recovery and we are seeing growth building,” Lewis, a former oil industry executive, said.
Paul Sullivan, a sector analyst at Barclays, described Capita as “still a work in progress, but with light at the end of the tunnel”. He raised his profit expectations for 2021 to £127 million on revenues of £3.2 billion. He reckons that Capita shares are worth 80p each.
Christopher Bamberry, an analyst at Peel Hunt, sees Capita as a company stabilising. His target price for the shares remains at 41p.
