Why I’m sticking with Capita plc for now

Capita plc (LON:CPI) could deliver serious upside if its turnaround is successful

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m sticking with my investment in Capita (LSE: CPI), despite last week’s shock profit warning which wiped more than £1bn off its market capitalisation.

Why? There are two key reasons. First, Capita’s share price reaction is partly driven by the fear that the company could soon follow in the footsteps of Carillion, a scenario that seems very improbable to me. Second, a potential turnaround at the company could deliver serious upside for shareholders, given its current valuation.

Capita isn’t Carillion

I hope it’s not confirmation bias that has driven me to think Capita is not another Carillion, as there are some very noticeable differences between the two companies.

Firstly, Capita’s balance sheet is in much better shape than Carillion’s was a year ago. Although both had big debts and pension deficits running into the hundreds of millions, Capita’s financial liquidity is much more robust, as the company has more than £1bn in cash at the bank. Moreover, it also plans to raise £700m in fresh equity to further strengthen its balance sheet and to starve off a liquidity crunch.

Secondly, Capita is a different kind of outsourcer to Carillion. It isn’t involved in the sort of construction contracts that Carillion tripped up over. Instead, Capita offers services such as collecting the TV license on behalf of the BBC and helping private sector clients manage back office tasks.

Turnaround prospects

Capita has had similar problems to Carillion, such as relying too heavily on acquisitions and bidding too low to win contracts, but it’s in much better shape to deliver a turnaround at the business.

There’s still value in the outsourcer’s contracts, with Capita still set to generate between £270-300m in underlying pre-tax profits in 2018. There’s a plan to simplify the business, by selling non-core assets, and I reckon it has the right person at the helm of the company. CEO Jonathan Lewis is a well-respected turnaround specialist, having previously taken on the job of troubleshooting Amec Foster Wheeler.

Analysts at HSBC suggest a turnaround scenario could over time lead to a doubling in its share price, although it reckons it is too early to factor that into the valuation right now.

A better turnaround play?

Another turnaround play that may be worth a closer look is Petrofac (LSE: PFC), the mid-cap oil services company that’s been embroiled by a corruption investigation by the Serious Fraud Office (SFO).

Shares in Petrofac took a tumble this week as the company warned its shareholders that the SFO was deepening its investigation into alleged bribery, corruption and money laundering. If Petrofac is found to be guilty, it could face the prospect of a multi-million pound fine, which could greatly hurt its balance sheet and its ability to win new contracts.

New orders

So far, though, its higher counterparty risk has done little to hurt Petrofac, as it continues to secure new business at a robust pace. The company secured $5.2bn worth of new orders in 2017, bringing its order backlog to a total of $10.3bn, which reflects an impressive recovery from a year ago.

This demonstrates its strong underlying fundamentals, which is underpinned by its focus on the Middle East, where the relatively low costs of production in the region have shielded the company from the savage cuts to capital spending in the oil & gas industry.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has a position in Capita plc. The Motley Fool UK owns shares of Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »