Fool's Eye View

[ February 22, 2000 ]

Capita e-Capitalises

By Maynard Paton (TMFMayn)

Carburton Street, London -- Capita Group (LSE: CPI), it appears, is one of those companies that is just so boring and predictable. The company, a "business process outsourcer", takes on board some of the essential, but rather tedious, white-collar activities from its customers. Typical activities include relieving customers of their IT, personnel and payroll departments, leaving the clients to concentrate on their core activities.

It's all hardly exciting stuff, but the profit record and share price performance is far from dull. A tripling in earnings in the last four years has led to a tenfold rise in the share price. But not even this substantial outperformance, it seems, can stir that much interest on our Foolish Capita discussion board.

And still the remarkable profit growth continues, confirmed today with Capita releasing another set of storming annual results. Total turnover rose 38% to £327m, operating profits rose 35% to £36.4m, and earnings per share rose 36% to 12.2p.

Alongside all the details covering last year's achievements, securing further work from local government authorities and central government agencies, Capita announce a series of technology related agreements.

One major deal comes with Microsoft (Nasdaq: MSFT). With Tony Blair's election promise of "Education, Education, Education" ringing in their ears, Capita have gradually established a foothold in the growing outsourcing arrangements to be had within the educational sector. The deal with the software giant is to help develop an educational computer operating system and an Internet portal, both of which will "coordinate and deliver all aspects of e-learning, e-assessment, e-commerce and e-services".

The other major Capita arrangement is through Oracle (Nasdaq: ORCL), bringing their "extensive e-government experience", and eLoyalty (Nasdaq: ELOY). All three companies have joined forces to develop a customer relation management system for local councils. The services will allow for more efficient and effective handling of local government enquiries through call centres. Having worked in local government before, I can assure you of the huge potential these applications ought to have.

Just like the pure IT outsourcers, such as CMG (LSE: CMG) and Sema (LSE: SEM), there is only one problem for potential investors to contemplate with Capita -- the dizzy share price. At 1300p, the shares trade at 106 times the earnings announced today. Operating in an industry that is forecast to grow at 40% per annum for the next few years, with a very predictable income stream, does offset the eye-watering valuation slightly. Capita are a class act, and have capitalised superbly on the outsourcing trend. The deals with the US software giants cement the group's credibility. But a true leap of faith is required to consider Capita at its current stratospheric rating.

Related Links
• Foolish Capita discussion board