The Capita (LSE:CPI) share price has had an eventful five years. Since May 2018, it has fallen by 73%. But over the past year it’s up 37%.
So, is the stock now a bargain?
A brief history
Capita is an outsourcing business. It provides a multitude of services to both the public and private sectors, including collecting council tax, operating 999 call centres and advising on large scale engineering projects.
On the back of successive governments looking to privatise more functions, the company grew rapidly and became a member of the FTSE 100 in 2006.
However, in 2018, not long after being appointed, its chief executive issued a profits warning, suspended the dividend, and embarked on a radical programme of cost cutting. Later that year, the company had to raise £700m. It now doesn’t make the FTSE 350.
The business had grown too quickly and become overly complex.
It therefore set about reducing the number of operating divisions from 10 to two, disposed of non-core assets to reduce its debt, and concentrated on “winning more of the right work“.
The directors believe they’ve now completed the transformation and stabilisation phases of the turnaround. And according to its latest update, the company is well positioned to grow once again.
Is it?
Future prospects
Investors appeared to like the company’s 2022 results. Capita’s shares rocketed by 46% during the three days following the announcement that it had made a profit of £74m, compared to a loss of £123m in 2021.
But its order book and sales pipeline are both flat, although there are big differences between its two divisions.
| Order book by division | 31.12.21 (£m) | 31.12.22 (£m) | Change (%) |
| Public Service | 1,233 | 1,652 | +34 |
| Experience | 1,566 | 1,114 | -29 |
| Total | 2,799 | 2,766 | -1 |
| Sales pipeline (weighted) by division | 31.12.21 (£m) | 31.12.22 (£m) | Change (%) |
| Public Service | 3,286 | 2,985 | -9 |
| Experience | 2,272 | 2,527 | +11 |
| Total | 5,558 | 5,512 | -1 |
And the situation may not improve. A change of government could lead to more services being brought back under public control.
The company’s reputation will also have been damaged as a result of a cyber attack that took place at the end of March. It claims that only 4% of its servers were affected. But an investigation is underway to ascertain the full extent of the damage.
Time to buy?
I think Capita has probably turned the corner after its recent struggles. But I think it has a long way to go before it sees rapid growth again.
The forecasts of analysts covering the stock are usually a good guide, although not fool proof. The average of the predictions for 2023 revenue is £2.91bn (2022 actual: £2.85bn). And profit before tax is expected to be £93m (2022 actual: £74m). These are not much different from last year’s figures, although I acknowledge they’re going in the right direction.
However, the company’s shares trade on a price-to-earnings (P/E) multiple of around six.
This is on the low side and does imply that Capita’s stock represents good value, although I don’t think it’s in bargain territory.
The company hasn’t paid a dividend since 2017, which means — if I owned the stock — I’d be relying on capital growth to make a return.
Therefore, until its growth prospects become clearer, I’m not going to invest. I believe there are better opportunities elsewhere. However, I shall watch the company’s progress with interest.
