Capita Plc

Capita Plc (LON: CPI) is a London, the United Kingdom-based company, which provides support services to clients in the public and private sectors.

Rationale for Valuation – Speculative Buy at GBX 34.87

• The Company expects a stable business, with sustainable free cash flow for the shareholders.
• It expects to make further disposals which will strengthen the balance sheet. Capita has continued to trade in line with the anticipations.
• As per the valuation metrics, EV/Sales, Price/Earnings, and EV/EBITDA multiples of CPI are currently lower than Professional & Commercial Services industry multiple.
• In the last three months, the Company has delivered a decent return of ~49.35%, which was higher as compared to the FTSE 250 Index.
• From the technical standpoint, 14-day RSI stood at 44.10, which is supporting the upside movement.

Key Risks

• The operational and financial pressures have slowed down the transformation programme.
• The Company may fail to refine strategy for medium-term, delaying the transformation and weakening the balance sheet.
• The COVID-19 pandemic has put clients, customers and the service delivery under huge pressure. This pandemic has also thrown up a myriad of challenges and opportunities.

Recent News

On 11 January 2021, the Company confirmed that it had signed the contract to deliver Royal Navy and the Royal Marines, which will be worth an estimated £1 billion for Capita.

Trading Update (for the period ended 30 September 2020 (Q3 FY20) as on 10 November 2020)

(Source: Company Website)

• In Q3 FY20, the Company’s trading was in line with the expectations as the greater revenues have remained resilient.
• It has improved operating profit and adjusted EBITDA from the corresponding period of the last year.
• However, the Company saw a year-on-year reduction, primarily in transactional business (due to the impact of Covid-19).
• Moreover, the Company continued to proceed with the disposal of the Education Software Solutions business.

 One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Capita continues to make further progress with the disposal of non-core assets, which will strengthen the balance sheet. The Company stated that the trading has remained in line with the expectations, and it expects to comply with the debt covenants at 31 December 2020. The Company continued to deliver operational improvement to tackle covid-19 related uncertainty with strong and decisive actions. Overall, the Board stays confident in Capita’s ability to emerge from such an unprecedented period and also sustainable for the long term. It also signed a contract to deliver Royal Navy training. The stock made a 52-week low and high of GBX 19.84 and GBX 158.05, respectively.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Capita at the current price of GBX 34.87 (as on 28 January 2021, before the market close at 9:25 AM GMT), with lower-double digit upside potential based on 6.23x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

XPS Pensions Group Plc

XPS Pensions Group Plc (LON: XPS) is a United Kingdom-based holding company, which is involved in pensions actuarial, consulting, and administration business.

Rationale for Valuation – Speculative Buy at GBX 119.90

• The Company has reduced the leverage after the strong operating cash-flow conversion, which resulted in net debt/adjusted EBITDA of 1.78x (30 September 2019: 2.34x).
• Despite the challenging trading conditions, XPS has maintained the interim dividend post reporting significant revenues and EBITDA growth.
• As per the valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Book multiples of XPS are currently lower as compared to Investment Banking & Investment Services industry multiple.
• From the technical standpoint, 14-day RSI stood at 35.36, which is supporting the upside movement.

Key Risks

• The Company can face aggressive competitor pricing, major technological innovation, and change in consumer demand.
• The economic downturn can impact operational and financial performance as it leads to significant market volatility, currency changes, and interest rates.
• In the short-term, the UK Asset management industry is likely to remain under pressure due to increased market volatility in both equity and fixed-income securities.

Financial Highlights (for the half-year ended 30 September 2020 (H1 FY21), as on 26 November 2020)

(Source: Company Website)

• In H1 FY21, the Company delivered a resilient performance, with an increase in revenue of 9% YoY and adjusted EBITDA of 11% YoY.
• It maintained a strong cash conversion, with operating cash-flow conversion of 134% and net debt/adjusted EBITDA of 1.78x as of 30 September 2020.
• The Board declared an interim dividend per share of 2.3 pence, which was in line with the previous year.
• National Pensions Trust has passed the milestone of £1 billion AuM (Asset Under Management).
• It also wins new business in the Investment Consulting division.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company expects that 2021 full-year will be in-line with the anticipations. XPS has been performing resiliently despite the Covid-19 pandemic with a high degree of visibility on revenues as it expects demand for additional services to continue as pension trustees have been seeking advice and support throughout the pandemic. Further, the Company is also expecting to gain further market share with new opportunities lying in Pensions Actuarial & Consulting domain. Overall, the Board is encouraged by the performance of H1 FY21, and it is well-placed emerge strongly from the crisis and take advantage of the favourable end-market dynamics. The stock made a 52-week low and high of GBX 103.00 and GBX 159.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on XPS Pensions Group at the current market price of GBX 119.90 (as on 28 January 2021, before the market close at 10:24 AM GMT), with lower double-digit upside potential based on 15.26x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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