Is this penny stock a potentially exciting recovery play?

Jabran Khan delves deeper into this outsourcing business, currently trading as a penny stock. Are there signs of life ahead and should he buy the shares?

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One penny stock that could be an exciting recovery play is Capita (LSE:CPI). Should I buy the shares for my holdings? Let’s take a closer look at past issues as well as the outlook ahead to help me decide.

Capita shares struggle

Capita is a business process outsourcing company with a focus on consulting, transformation, and digital services. It has operations in the UK, Europe, India, and South Africa across three divisions, which are Capita Public Service, Capita Experience, and Capita Portfolio.

A penny stock is one that trades for less than £1. So what is the current state of play with the Capita share price? Well, it has been on a downward trajectory for some time. The recent stock market correction had an impact on all stocks and some were able to bounce back. As well as this Capita has had its issues in recent years too.

Capita shares are currently trading for 20p. At this time last year, the shares were trading for 42p, which is a 52% decline over a 12-month period.

For and against buying Capita shares

FOR: I took some positives from Capita’s most recent full-year results announced on 10 March. Despite overall revenue and profit falling compared to 2020 levels, Capita said it won £3.8bn worth of new contracts, up from £2.9bn in 2020. A penny stock with unmanageable debt levels is usually a red flag for me. Capita reported it has made some good headway reducing its debt level.

AGAINST: One of the biggest issues I have with Capita is the fact it seems to be struggling with contract attrition. It anticipates that increased attrition rates will have a material impact on revenue growth and financials ahead. This would affect performance and returns.

FOR: The shares do currently look dirt-cheap on a price-to-earnings ratio of just two. Another positive is that Non-Executive Director John Cresswell purchased 45,000 shares after 2021 results were announced last month. Insiders buying shares is always a positive in my eyes. If those who know best the direction and potential of a business are willing to part with their hard earned cash to buy shares then maybe I should too.

AGAINST: I do understand that past performance is not a guarantee of the future, but in Capita’s sector, reputation is crucial. It has lost contracts in the past based on being unable to deliver agreed duties. One instance that springs to mind is an NHS contract it lost when it failed to provide reminders to patients for cervical screenings. The NHS bought this service back in house after these issues. This could affect future contract negotiations and wins.

A penny stock I’d buy

Small caps are often seen as risky investments. I like to look out for small-cap shares that are showing signs of potential for the future ahead. The full-year results, especially debt reduction, lead me to believe Capita could experience growth in the longer term ahead. Insiders buying shares is also a sign of confidence too. I’d buy a small number of shares and hold on to them for the long term although I do expect some turbulence in the short to medium term.

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.

Jabran Khan 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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