Like billionaire investor Warren Buffett, I’m always on the hunt for top value stocks to buy. And Capita (LSE:CPI) — whose share price has soared on Tuesday (9 July) — looks like a bargain based on current profit estimates.
The outsourcing giant has rocketed in value after announcing a transformative asset sale. But at 18.8p per share, it still trades on a rock-bottom forward price-to-earnings (P/E) ratio of 6.4 times.
So should I add the shares to my portfolio today?
Big sale
The small-cap company provides a wide range of outsourcing and professional services to the private and public sectors. These services include operating call centres, executing human resources and accounting functions, providing sofware and IT infrastructure, and supplying business consultancy.
Its share price surged on Tuesday after it announced the sale of its Capita One software business for £207m. The division chiefly provides local authorities and housing associations with the tools to maximise revenues collection and cut costs from their operations.
The sale to MRI Software is expected to complete towards the end of August, before which time Capita will receive a £4.8m dividend from Capita One.
Capita said that the disposal “follows an evaluation of certain activities… that are not core to the group’s future strategy“. This includes standalone software services such as those provided by its soon-to-be-divested unit.
Under pressure
The sale will give the balance sheet a big boost and help it better meet its revised growth objectives. The business — which has a market capitalisation of £316m — had net debt of £545.5m as of December.
Capita’s been a disaster zone for investors over the past decade, its share price tumbling 98% in that time. It collapsed following the onset of Covid-19, and has failed to reclaim its previous heights.
The firm’s been a victim of surging costs as it’s become larger and increasingly inefficient. It was also hit by a massive cyberattack last March that saw hackers obtain customer data from around 90 organisations.
As well as causing reputational damage, the attack resulted in £25m worth of costs that pushed Capita further into the red. On a pre-tax basis, it swung to a loss of £106.6m in 2023 from a £61.4m profit a year earlier.
High risk
Last year’s rude awakening has prompted it to embark on a huge transformation programme. It set a £100m cost-cutting target in March. And last month it announced a large restructuring that will see it concentrate on areas like public services and contact centres.
Judging by broker forecasts, these steps could make the business one of the London stock market’s hottest growth stocks. Earnings are tipped to leap 74% year on year in 2024. And rises of 33% and 23% are predicted for 2025 and 2026, respectively.
I’m not convinced by these electrifying estimates, however. And neither is the market, which in turn explains the low valuation on Capita shares.
It’s not a good sign that revenues dropped 9% during January-April due to contract losses and weaker contract activity. The fallout of last year’s data breach could be significant. And there is still much uncertainty over Capita’s transformation plan.
So on balance I’d rather look for other value stocks to buy right now.
