The Capita (LSE: CPI) share price was one of the worst hit by the pandemic. Even today, when most of the UK stock market has recovered quite well, Capita shares are still down 82% in the past five years.
Is it a no-brainer buy now, or would that be throwing good money after bad?
Outsourcing
Capita is billed as one of the country’s leading outsourcing firms. It has public and private business and has its fingers in a lot of pies.
The London congestion charging scheme, council tax, and 999 centres are among its government contracts. And it’ has’s involved in all sorts of construction contracts too.
But Capita was struggling even before Covid came along and stuck the boot in. It had grown too big, too fast. It stretched itself too far and had to rein things in.
Massive fall
In the days before the 2020 stock market crash, the Capita share price stood at around 150p. Today we can buy some for 28p. But things are even scarier than that.
At their peak back in June 2015, before the firm’s rapid growth turned round and bit it, the price was up at 800p. From then to today, that’s a humungous fall of 96.5%.
So should we fill our boots, or not touch this one with a bargepole?
On the face of it, I think Capita’s valuation looks attractive.
Low valuation
The company is profitable and its earnings are expected to rise in the next few years. Forecasts put the price-to-earnings (P/E) ratio at eight for this year, dropping to six by 2025.
Analysts even think the dividend will come back too, though only for a small yield of 1.5% by 2025. Still, even that could show some confidence in future cash flow.
FY22 results were quite a turnaround. The firm showed an adjusted pre-tax loss and a cash outflow in 2021. But it turned them round in 2022, posting £73.8m in pre-tax profit, with £116.5m of free cash flow.
Bargain buy?
So low P/E, back to profit, and upbeat forecasts. What’s not to like? Well, a few things.
Capita ended 2022 with net debt of £482m. That’s slightly more than the stock’s market-cap of £473m, and it makes that low P/E meaningless.
To buy the whole company and pay off the debt, a well-heeled investor would have to shell out for the equivalent of a P/E of 16. Perhaps not such a bargain.
I also fear for Capita’s long-term future.
Political change?
The current government has a history of outsourcing public business. But the chances of Rishi Sunak holding on to power in the next election don’t look great right now.
I doubt Sir Kier Starmer will be too keen to push on with the same policy. And public stuff accounts for around half of Capita’s sales.
What’s my take? No, I don’t see Capita as a no-brainer buy. But it’s not into bargepole territory for me either.
With the uncertain long-term future for public outsourcing, I can only rate it a ‘wait and see’. H1 results are due on 4 August.
