One bargain stock I’d pick over Capita plc

Paul Summers is still avoiding battered outsourcer Capita plc (LON:CPI) and thinks one of its peers could be a safer bet.

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Following the perhaps inevitable demise of Carillion, it’s no surprise if market participants are wary of throwing their capital at outsourcing firms at the moment. Another that’s been hit hard by poor sentiment following a Brexit-related slowdown in the UK economy has been Capita (LSE: CPI).

Since I last looked at the company back in December, stock in the £1bn cap — which provides ‘efficiency’ services to a wide range of businesses in the public and private sectors — has continued to sink in value. Much of this can be attributed to January’s announcement that it would be launching a £700m rights issue in order to bring the company back on track following a spate of profit warnings.

More recently, Capita has revealed that it has created a new position — the interestingly-titled Chief People Officer — who will take a broom to the company’s staff roll. The successful candidate and former Amec Foster Wheeler man, Will Serle, now supports CEO Jon Lewis in the latter’s attempts to the turn the struggling company around. 

Although full-year results have now been delayed while the aforementioned (heavily discounted) rights issue is finalised, we do know that Capita also plans to offload a number of its businesses to address its seriously overburdened balance sheet as well as focusing on those markets that offer the greatest upside in terms of growth.  

Investing in turnaround stocks can be a profitable endeavour so long as you possess sufficient skill or luck in selecting the right companies. When it comes to Capita, however, I think the risk of further downward pressure on the share price remains too great.

Instead, I’d consider industry peer Kier Group (LSE: KIE).

A safer bet?

Today’s interim numbers, while falling short of analyst expectations, weren’t disastrous. Underlying revenue rose 8% to £2.15bn in the six months to the end of 2017. Underlying pre-tax profit also increased by 5% to £48.8m. Positively, the Sandy-based business reported good returns on the money it has invested in both its Property and Residential divisions (23% and 11% respectively). 

Looking ahead, Kier revealed that 100% of its forecast revenue in its Construction and Services divisions had been secured for the year to the end of June and more than 65% secured to June 2019. The order book here now sits at £9.5bn. There’s also a £3.5bn pipeline in its Property and Residential Divisions.

According to CEO Haydn Mursell, the £1bn cap’s portfolio gives the company “balance and resilience“.  He went on to reflect that the firm looks set to deliver “double-digit profit growth” in 2017/18 and remains on track to achieve its strategic targets.

In contrast to Capita, Kier’s balance sheet appears in far better shape. Although net debt rose to £239m (from £179m in the previous year) as a result of ongoing investment, this is expected to be equivalent to “less than 1 times” earnings before interest, tax, depreciation and amortisation (EBITDA) by the end of June. A reduction in the company’s “minimal” pension deficit to £19m is also encouraging and a massive contrast to the situation at Capita. 

While a 2% hike to the interim dividend may not seem much, it’s also worth mentioning that Kier is forecast to yield a (seemingly affordable) 6.8% yield in the current financial year. 

Trading on 9 times earnings, I think the business warrants attention from those looking for value and/or income.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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