Research: Industrials
Capita faced numerous cash drags in FY23, notably £20m in costs associated with a cyber incident, a £30m pension deficit contribution and a £20m increase in technology capex, which depressed the adjusted free cash outflow before disposals to £116m (£42.4m outflow in FY22). Despite these challenges, the implementation of a rigorous cost efficiency programme and the strategic divestment of non-core assets have the potential to fuel a turnaround. Some £160m of annualised cost savings are expected to be realised by mid-2025 (part reinvested for growth), aimed at bolstering a significant improvement in operating margins. As margins improve, shifting to faster-growing market segments with a more competitive cost base could catalyse a reduction in the valuation discount.
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Capita |
Capitalising on a more streamlined business
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Industrial support services |
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7 March 2024 |
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Capita faced numerous cash drags in FY23, notably £20m in costs associated with a cyber incident, a £30m pension deficit contribution and a £20m increase in technology capex, which depressed the adjusted free cash outflow before disposals to £116m (£42.4m outflow in FY22). Despite these challenges, the implementation of a rigorous cost efficiency programme and the strategic divestment of non-core assets have the potential to fuel a turnaround. Some £160m of annualised cost savings are expected to be realised by mid-2025 (part reinvested for growth), aimed at bolstering a significant improvement in operating margins. As margins improve, shifting to faster-growing market segments with a more competitive cost base could catalyse a reduction in the valuation discount.
FY23 faced with numerous obstacles
FY23 results appear severely depressed, affected by one-off items of £42m in goodwill impairment on business exits, £25m in cyber incident costs and £54.4m in cost reduction expenses, with EBITDA decreasing 39% y-o-y to £144.5m and a reported loss before tax of £106m (FY22 PBT: £61.4m). Nevertheless, these costs mask the underlying growth in contracts such as Personal Independence Payments, alongside a commercial settlement, with adjusted, continuing PBT increasing 14% y-o-y to £56.5m. The company saw sustained contract momentum, with a year-end total contract value of £3.1bn (FY22: £2.6bn); key contract wins include a 10-year contract to manage the Civil Service Pension Scheme and incremental scopes of work to deliver the FAS and the DSA.
The road to positive sustainable cash flow
Capita is undergoing a transformation phase, with the completed sale of its 75% stake in Fera Science for £62m in cash, marking the final disposal of the Portfolio division and enabling the streamlined business to focus on its two core divisions. In addition, in FY23 Capita paid £30m of regular pension deficit contributions and will pay a further £21m in FY24, with zero payments in FY25 and beyond. Its rigorous cost restructuring programme, which aims to save c £160m on an annualised basis (£60m to be delivered from Q124 and an incremental £100m by mid-2025, part of which will be reinvested for growth), should support significant margin recovery.
Valuation: Seeds sown for a potential recovery
A substantial downward trend in EPS has driven Capita’s share price to fall c 90% since January 2020, currently trading on a consensus 2025e P/E of 3.6x (a c 60% discount to peers). Its extensive cost restructuring programme, and now more streamlined business model, could catalyse a reduction in the valuation discount.
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Consensus estimates
Source: LSEG. Note: Adjusted figures. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: Investment Companies
International Public Partnerships (INPP) recently held a strategy day. This provided a detailed overview of its business and the outlook for a continuation of the strong, predictable, inflation-linked returns that have been generated since the company listed in 2006. INPP’s operational and financial performance is at odds with its discount to NAV and the company has a clear strategy to address this. No new financial details were provided ahead of INPP’s 2023 results, due to be published on 28 March.