The Capita share price is down 15%: should I buy now?

The Capita share price is down 15% in the past year. Will the stock drop further or rise? Royston Roche analyses the stock.

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The Capita (LSE: CPI) share price fell about 15% in the past year. Over a five-year period, the stock is down 95%. However, the company has been able to see some turnaround in its business lately.

Should I use this opportunity to buy the stock?

Capita’s recent trading update

Capita sees an improving trend in its trading performance. It expects revenue growth in 2021 and this is the first time in the past six years that the company has had revenue growth. Revenue had dropped from £4.36bn in 2016 to £3.32bn in 2020. Most of the companies I have reviewed had decent growth in that period. I believe this is one of the reasons for the company’s low stock returns. 

The company won significant contracts this year, which in my opinion, should help to support the falling Capita’s share price. Some of the notable contracts include the Royal Navy Training contract for £925m. The company is one of the leading contractors for the UK government. In addition, the customer management segment got an extension of a European telecoms client contract for £528m. With these new contracts, management expects the current half-year adjusted revenue to be flat. 

Capita’s cash collection is in line with the improving trading performance, which helped increase liquidity to £689m as of 17 June 2021. It has a loan repayment of £160m in July 2021. This year, the company had set out a plan to strengthen its balance sheet by disposing of the non-core assets. It also recently announced the sale of Axelos, a 51% joint venture with the Cabinet Office, which will generate cash proceeds of £184m for the company. Capita’s share price rose when the deal was announced on 21 June 2021. 

The company’s plan to restructure its business is also progressing well. It will have two core divisions in the future: Capita Public Service and Capita Experience, and a third division, Capita Portfolio, will hold the non-core assets. This will save the company about £50m of annualised cost savings from 2022 onwards.

Some of the risks to consider

The company has high debt. As of 31 December 2020, the company had net debt of £1.1bn. In contrast, the company’s market capitalisation is only about £650m. The high debt is also one of the reasons for Capita’s share price to remain low. 

Capita’s contracts with the NHS in the past have been criticised as they failed to meet the requirements. For example, cervical screening patients were supposed to be sent an invitation and reminder letters. However, the company had failed to do this. As a result, the contract was scrapped and NHS had to bring the service back in-house.

Final view

The restructuring of the business, in my opinion, is the right step for the company. However, the high debt is still a concern. Also, there is still uncertainty about the long-term growth of the company. So I will keep the stock on my watchlist for now. 

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 considered so you should consider taking independent financial advice.

Royston Roche 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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