Jefferies ups Capita to 'buy' on software division potential
Shares in outsourcer Capita rallied on Thursday as Jefferies upgraded the stock to 'buy' from 'hold', highlighting the potential of the company's software division.
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Jefferies, which cut its price target to 180p from 200p, said it remains cautious on the outlook for UK outsourcing as attrition is expected to remain elevated. It said the company's interim results "removed investor euphoria" as free cash flow was weak and management's revenue growth narrative softened.
However, Jefferies argued that Capita's software business could be its differentiator, as it has a brighter revenue outlook, attractive free cash flow characteristics and recently won a contract in India.
In addition, it said Capita's FY20 margin guidance may be conservative.
"If we add in cost savings (Capita’s targets are slightly more ambitious than peers as a percentage of revenue) and assume loss-making contracts are restored to break-even (a circa £30m profit tailwind) then the FY20E EBITA margin could move back toward the 11% figure reported in FY17.
"This is ahead of management’s 10%+ target and our 10.5% forecast but consistent with the CEO’s comment in April 2018 that a leaner business should generate a margin similar to the past."
In its interim results earlier this month, Capita posted a 59% drop in pre-tax profit but the company's CEO insisted he was making "good progress" on turnaround plans.
At 1115 BST, the shares were up 6.6% to 136.75p.