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Capita trading in-line

Charles Huggins | 11 December 2015 | A A A
Capita trading in-line

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Capita plc Ordinary 2 1/15p

Sell: 45.61 | Buy: 45.78 | Change 1.48 (3.36%)
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Capita is on track to deliver low double digit underlying revenue growth in the full year, including organic growth of around 4% net of attrition. Organic growth is still expected to accelerate in 2016, despite a recent slowdown in the nursing and teaching staffing operations. The full year underlying operating margin is expected to be within the target range of 12.5% to 13.5%, and comfortably ahead of H1 2015 (12.7%). The shares rose slightly in early morning trading.

The bid pipeline currently stands at £5.1bn (July 2015: £5.4bn), comprising 29 bids (98% new business and 2% renewals) on which decisions are expected within the next 12 months. Capita has secured £1.77bn (Nov 2014: £1.63bn) of major new contracts and extensions to date.

Capita has acquired 16 companies so far in FY15 for a total consideration of £375m, and continues to dispose of small less profitable businesses. They will not be revising their cash offer of 160 pence per share for Xchanging, after CSC Computer Sciences International outbid them (offering 190 pence per share in cash).

Our view

It is hard to grumble with Capita's long term track record. The company has sustained double-digit growth in revenues, profits and dividends for the best part of two decades, through a combination of organic growth, supplemented by regular bolt-on acquisitions.

Capita benefits from a large base of repeat revenues. Its contracts tend to last for anything between 5 and 20 years, providing a recurring revenue stream for the length of the contract. With no material contracts up for rebid until 2019, Capita benefits from a degree of revenue visibility that other companies can only dream of.

Long term contracts can sometimes be a double-edged sword. Bid too aggressively and you risk incurring substantial losses; or severe reputational damage if you try and cut corners. Just ask G4S or Serco. But, so far, Capita hasn't had any such issues, and profits are well backed up by cash flows.

The shares trade on a forward price to earnings ratio (P/E) of 15.7x which is a modest discount to their historical average, at a time when the market as a whole is trading well above its historical P/E rating. The yielfd for the current year is 2.7%.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.