Capita Plc – Expects sustainable growth in the long term

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 25.64

• As per the valuation metrics, Price/Book, EV/Sales, Price/Earnings, and EV/EBITDA multiples of CPI are currently lower than Professional & Commercial Services industry.
• The Company has disposed of Eclipse and has launched a process to sell ESS. This will improve the cash position in the long- term.
• It expects a stable business, with sustainable free cash flow for the shareholders.
• From the technical standpoint, 90-day RSI stood at 40.21, 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, which may delay the transformation and could weaken 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 25 September 2020, the Company has changed the registered office address to 65 Gresham Street, London EC2V 7NQ, with immediate effect.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 18 August 2020)

(Source: Company Website)

• Cash from trading operations improved by timing on movements in contractual working capital.
• Further, the free cash flow enhanced by accelerated customer payments and lower capex.
• The Company continues to make progress through operational improvement for transformation.
• Cash conservation actions in H1 FY20 led to improved liquidity by £209.4 million to £704.1 million.
• VAT deferral, lower restructuring costs and lower pension deficit payment helped to reduce net debt levels.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Group expects Covid-19 to impact transactional revenue and volumes negatively, while additional cost actions and reversal of holiday accrual to benefit the performance in the second half of the financial year 2020. Despite the decline in H1 FY20, the Company continued to deliver operational improvement to tackle covid-19 related uncertainty with strong and decisive actions. The Company has scheduled debt repayments of around £500 million between 1 July 2020 and 31 December 2022. It has taken actions to align and simplify the Software portfolio and accelerated strategic decisions. Overall, the Board stays confident in Capita’s ability to emerge from such an unprecedented period. The stock made a 52-week low and high of GBX 19.84 and GBX 185.25, 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 25.64 (as on 16 October 2020, before the market close at 9:18 AM GMT+1), with lower-double digit upside potential based on 0.58x EV/NTM Sales (approx.) on FY20E sales (approx.).

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

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