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Why the Capita share price rose 15% in September

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It’s been a rough ride for investors in FTSE 250 outsourcing group Capita plc (LSE:CPI) in recent years.

Shares in the company fell off a cliff in January 2018 following a hefty profit warning, which was the culmination of a turbulent few years for the business after the stock briefly hit more than 800p in 2015.

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At its lowest point in April last year, the Capita share price traded for as little as 80p and many predicted a similar fate to that of construction services company Carillion in the same year.

However, the group has stabilised somewhat during 2019, with its shares gaining 15% in September and that upward trend has continued at the beginning of this month.

So what happened during September to push the stock higher, and how likely is it to continue its slow and steady rise in value?

Outsourcing services

Capita provides IT and technology-based outsourcing services to a number of government bodies and large companies, with many of the contracts it retains having been reviewed by CEO Jon Lewis when he took over in 2018

That review led to drastic action being taken in the form of profit warnings and a shareholder rights issue, and while it ultimately caused the catastrophic decline in its share price, it provided a clean slate for Lewis and the board to rebuild the failing business.

Fast forward to September 2019, and Lewis has resolved to stabilise operations at Capita, first and foremost through a series of cost-cutting measures that have reduced debt levels to more realistic proportions.

The company relies heavily on public sector contracts, with many of its major contracts with the likes of the British Army and the NHS having been revamped following restructuring efforts. These appear to have paid off as guidance for the second year of its turnaround plan is on track.

Capita also continues to win new clients, such as the £32m contract with the London borough of Bexley, showing that there is still plenty of demand for its technology-led services from the public sector. This was an addition to the announcement in August of a £525m Ministry of Defence fire and rescue project and a £145m extension to its PIP assessment contract with the Department for Work and Pensions in the third quarter.

Growth forecast

City forecasts have Capita earning 12.7p per share this year, with 20% forecast growth to 15.2p next year. The stock currently trades on a P/E ratio of less than 10, and perhaps some investors are beginning to place trust in the shares again.

On the face of it, it appears Lewis’ turnaround strategy is paying off for Capita, but the big question is how much higher the stock can go.

While I see a return to 800p as highly unrealistic, there have been enough signs of good management within the company that can guide it towards 200p by 2020. The impact of Brexit however may be a major reason to hold off for the time being, with the firm so reliant on the UK public sector.

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conorcoyle 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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