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(Sharecast News) - Shore Capital initiated coverage of Capita on Friday with 'buy' rating as it said the company's ambition and strategy to return to growth and ultimately positive cash flows offered an opportunity from normalising the group's profile.
"Low starting margins, leverage from key fixed cash costs and a spectrum of outcome assumptions yield a wide set of possible profit and cash flow destinations," the broker said. "For those with an appetite for risk, we initiate with a 'buy' rating and fair value estimate of 5.30, seeing an opportunity for upside as the group delivers on its plan for stronger margins medium term, transitions to positive adjusted FCF from this year and converts its opportunity pipeline into firm orders."
For others, more watchful for now, Shore detailed the milestones that if achieved could increasingly de-risk the outlook and narrow the landing zone of possible outcomes. Shore pointed to three milestones for FY26 it was looking to for confirmation the group is on track.
Firstly, delivery of the positive free cash flow target from the end of FY25 as a meaningful pivot point versus group history.
Secondly, visibility forming on how Capita expects its profit dynamic to develop beyond this year and managing that transition smoothly. It noted the completed 250m cost savings plan - fully benefitting FY26 - has strongly underpinned performance since FY24.
Thirdly, the contact centre segment building green shoots of progress into stabilised revenues first and then a return to growth second. Shore said significant work has been done to raise its proposition and efficiency of delivery, yielding 100% UK renewals in H1 FY25.
Analysts at Berenberg hiked their target price on serviced offices and coworking business International Workspace Group from 270p to 350p on Friday, stating that the firm was building a track record in delivery and accelerating its capital-light transition.
On 4 December, IWG hosted an investor day outlining a continuation of the plan that management had set out in 2023, but with "strategic pace" set to accelerate, said Berenberg.
The German bank said IWG was building "strong momentum" towards growing its capital-light managed and franchised division, which today represents roughly 33% of group locations. However, including IWG's current pipeline, Berenberg noted that this would increase to 50% with the company seeing scope and potential to push this towards approximately 80% and beyond by 2030.
"As the company executes against its plan, we expect a steep inflection in FCF generation and with a robust balance sheet, IWG has potential to execute material buybacks," said Berenberg, which reiterated its 'buy' rating on the stock.
"IWG trades on 6.5x FY26 EV/EBITDA and at its current price, we expect it to average a c9% FCF yield over FY26-28E, and to reach c11% in FY27E. We adjust our WACC in our DCF valuation to 10%, reflecting delivery of its strategic plan and our price target increases to 350p/share."