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FTSE 100 falls on Deutsche worries while Capita drops another 4%

Discussion in 'Market News' started by Lily, Sep 30, 2016.

  1. Lily

    Lily Forum Member

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    Outsourcing group leads FTSE fallers after Thursday’s shock profit warning

    Leading shares have dropped sharply, with banking shares among the main losers after continuing concerns about Deutsche Bank.

    But outsourcing group Capita takes the wooden spoon, down another 27p or nearly 4% to 671p as analysts issued negative notes in the wake of Thursday’s shock profit warning which lead to a near 27% slump in the shares. The company blamed Brexit jitters, problems with the London congestion charge contract and a contractual dispute with the Co-operative Bank. Analysts at Stifel said:

    It is clear from [the] profit warning that some of Capita’s woes are deep-rooted and structural in nature. This will take time to rectify. On our revised estimates and at the intraday price, the shares are trading on little more than 10 times 2017 estimated earnings, at a deep discount to the 10 year through the cycle average of 16.8 times. However, given the scale of Capita’s problems, the risk of litigation, restructuring costs still to be defined and possible action to strengthen the balance sheet, we think this is reasonable with the share price likely to be volatile.

    Given the sharp de-rating, instinctively we want to turn more positive on the stock, particularly as on our forecasts the company will delever. However, the lack of top-line visibility and possible risk of a capital raise gives an asymmetric pay-off and we remain at hold with a lower 750p target price.

    Whilst we have harboured concerns in our research for some time over the level of growth driven by acquisitions, sustainable margins and growing debt levels, we were nonetheless surprised by the timing of yesterday’s profits warning. The specific’s and ‘one-offs’ that Capita point to as being primarily responsible only point to some of the issues that the group faces in our view, but these still point to some worrying strategic failures. We are particularly concerned by what we consider to be under-investment in organic development, such as in the education platform and addressing the digital opportunity in recruitment and sourcing – has this been at the expense of prioritising acquisitive growth? We view Capita as a services conglomerate following the disparate acquisitive activity of the last several years (we note the group has acquired around £2.0bn in revenue since 2010, with revised revenues forecast for this year now at £4.9n, group revenues in 2011 were £2.9bn). We believe that effective service delivery needs focus, but it can be scaled, as Capita has shown in the past. Looking to ‘Brexit’ as being a cause of Capita’s woes, our view is that this has likely hasted and accelerated trends already in play in the business.

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