The Capita (LSE:CPI) share price has been mired in penny stock territory since the pandemic. Following a 16% fall this year, the shares now trade near their lowest levels in almost three decades, although they have bounced a little in recent days after briefly sinking below 20p.
So, what went wrong for the consulting, transformation, and professional delivery services business? And is the share price slump a rare opportunity for me to buy a cheap stock, or a value trap?
Here’s my take.
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Fall from grace
Capita was once a FTSE 100 stock. Alas, those days are long gone. A few years ago the business ran into financial difficulty after successive bungled contracts, leading to a dividend suspension in 2018. It hasn’t delivered payouts since. Considering the company made a loss in H1 2023, I don’t expect this will change any time soon.
Data and IT outsourcing is the core of Capita’s business. It provides services to the public and private sectors in the UK, Europe, India, and South Africa. Most of its revenue comes from domestic sources. To its credit, the group’s worked on prestigious projects, such as London’s congestion charging scheme and Ultra Low Emission Zone (ULEZ).
However, recent financial results show the scale of the challenge Capita faces today. The group posted a reported pre-tax loss of £67.9m in H1 2023 — a move in the wrong direction after the threadbare £100k profit in H1 2022.
One reason behind the loss was a major cyber-attack launched against the company in March by the Black Basta ransomware group. The data breach resulted in the disclosure of personal information and passport images on the dark web. This culminated in a loss of up to £25m, which was higher than the group previously anticipated.
Beyond the immediate financial impact, the long-term reputational consequences are severe. Capita counts the military and NHS among its clients. These organisations can ill afford data breaches of this scale.
Future prospects
It’s tempting to write off the shares after these failures. However, the company’s making progress on some key metrics. Taking steps to repair the balance sheet, it reduced net debt by £165.8m to £544.6m. Additionally, it has accelerated its adjusted revenue growth for four successive reporting periods.
The company’s also secured valuable new contracts. The group landed a £250m contract to work on the Disabled Students Allowance framework with the Student Loans Company. Plus, as the preferred bidder for the Public Service for Functional Assessment Services, it expects to sign a £565m agreement with the Department for Work and Pensions in H2.
Whatever the future direction for the share price, the company will have to revive its ailing fortunes without CEO Jon Lewis at the helm. The Welshman has announced his intention to retire later this year. He’ll be replaced by Adolfo Hernandez, vice-president of global telecommunications for Amazon Web Services.
So can I get rich?
Although Capita shares look cheap today, I’m not convinced the company is my ticket to riches. The group still needs to make considerable progress and the reputational damage from the cyber-attack doesn’t fill me with confidence.
I’m avoiding this stock for now and looking elsewhere for shares with stronger growth prospects.
