Capita shares slide another 3%

Discussion in 'Market News' started by Lily, Feb 29, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
    Likes Received:
    Outsourcer falls as analysts worry about cashflow, growth and earnings quality

    Capita shares continue to slide as analysts cut their recommendations following the outsourcing group’s results last week and news that its chairman was stepping down.

    It is down nearly 3% at £10.01, with Berenberg reducing its target price from £11.60 to £10.90 with a hold rating and Panmure Gordon repeating its sell advice.

    The heavy fall in the share price post Capita’s prelims and the exit of its chairman [Martin Bolland], plus yet another change to segmental P&L and higher debt levels from public bond issues does not yet reflect the potentially significant new levels of risk in the business. Free cash flow growth at around 4% compound annual growth rate is not enough for us. Keep selling. We cut our target price to 900p (12.2 times PE) from 1000p on higher net debt and lower free cash flow.

    [We have] concerns on goodwill, growth, cash and quality of earnings.

    Capita’s 2015 results were largely in line with expectations, driven by 4% organic growth and a 20 basis point underlying margin expansion (up 40 basis points including disposals). While management guides for “at least” the same level of organic expansion in 2016, the company has its work cut out, considering it currently has visibility on only one quarter of that growth. With returns and free cash flow generation likely to decline further in 2016 following the contraction in 2015, we maintain our hold recommendation.

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