EXCERPT: The Capita share price has smashed the market in recent days and Harvey Jones wonders it has the rocket boosters to fly even higher
What a week for the Capita (LSE: CPI) share price! It’s up a stunning 46.79%. That kind of performance turns heads.
Thousands of investors will be thinking the same thing: why on earth didn’t I buy Capita last week? There’s a reason for that, of course.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Capita shares have been hopeless for ages. Over one year, they’re still down 24.84%. Over five years, they’ve crashed 81.7%. Investors have lost a lot more money on Capita than they’ve made. So what went wrong?
Capita is an outsourcing specialist and for many people, that will be explanation enough.
A troubled stock
Following the collapse of outsourcer Carillion, a Parliamentary committee “found that the Government’s overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial risk”.
Capita shares peaked at 795p in July 2015. Even after this week, they trade at just 20.26p. Last year’s massive cyberattack didn’t help. Capita has been through a lot.
Its latest results, published in May, did little to revive the share price, with adjusted revenues falling 9% in the four months to 31 April, due to local public service losses and reduced contract activity in defence and education. Capita is good at winning contracts, with a 77% success rate (albeit down from 80% in 2023). It’s not so good at making money from them.
Lift off began after Capita announced the renewal of its contract with the Cabinet Office to administer the Royal Mail Statutory Pension Scheme (RMSPS) on Tuesday, for an additional six years from 2026. An option to extend for a further two years would lift the contract’s total value to £48m.
But the real kicker was the news that it’s selling its public sector software business Capita One business for £200m to Orchard Information Systems, a subsidiary of MRI Software. First, it will bank a £4.8m cash dividend.
The board decided Capita was a non-core operation and the money raised would boost its balance sheet, pay down debt and fund its “transformation journey”.
Too risky for me
The news has applied rocket boosters to the share price, but I’m not sure it will continue to fly. Full-year 2023 results were a sluggish affair, with adjusted revenues up just 1.3% to £2.6bn.
Free cash flow was negative at £154.9m. Net debt was £545.5m, so the Capita One sale won’t clear all of that. It will still be large for a company with a market cap of £341m. No wonder the board is desperate to cut costs, targeting £60m of annual savings.
The outlook isn’t that exciting, as the board expects 2024 revenue to be broadly in line with 2023, with only a “modest improvement in operating margin”. The company has made a pre-tax loss in three of the last five years. Revenues have fallen too, as my chart shows.
| Revenues | £3.678bn | £3.325bn | £3.183bn | £3.015bn | £2.815bn |
| Pre-tax profit | -£62.6,m | -£49.4m | £285.6m | £61.4m | -£106.6m |
Another danger is that after the recent spike, investors could take their profits (or cut their losses). I suspect investors have had their fun for now. I can think of a heap of growth stocks I’d rather buy first.
