the London-listed consulting and outsourcing firm, have fallen so much that they have virtually nowhere left to go.
The stock (ticker: CPI.UK) has declined from a 2015 high of 1,294 pence to 30 pence (40 cents) after a series of government contracts disappointed and profit margins were squeezed. Shares are down more than 80% this year but climbed as much as 14% on Thursday after a media report said private equity firm CVC Capital Partners was interested in the company, according to Reuters. Subsequent reports quashed the speculation, citing sources close to CVC saying it had no plans to launch a takeover bid.
The company, which manages the tax levied on drivers taking their car into a specific central London zone, and is involved with recruitment for the British army, and offers business and consulting services, is weighed down by a 1.1 billion pounds sterling ($1.45 billion) debt pile that dwarfs its £524 million market value.
Forget earnings and dividends—investors are more focused on whether Capita will make it through the second half without breaching banking covenants—agreements made with banks over the terms of loans.
“Capita continues to look uphill in its recovery; meeting banking covenant is set to remain tight in the short term,” wrote Robin Speakman, an analyst with broker Shore Capital, in a note. “Assessing shareholder value remains challenging, in our view; we expect Capita to survive and this should deliver material value.”
There are other glimmers of hope. Capita is seeking to sell its Education Software Solutions, or ESS, unit for £500 million. The company also said in its half-year update that it won £770 million of new business.
In a statement to Barron’s, CEO Jon Lewis says, “The market is clearly challenging, but we are continuing to win new business and deliver for our existing clients as we build a more focused and sustainable business for the long term.”
Capita has “accelerated some strategic decisions,” including the sale of Education Software. “This prospective divestment, alongside other planned disposals, will help us to strengthen our balance sheet and deliver on our long-term aim of generating sustainable revenue growth and cash flows,” Lewis says.
Brave investors could see this as a buying opportunity, with Jefferies marking Capita stock a Buy and estimating that it could rise 250%, to 105 pence. Broker Numis sees the price rising to 80 pence.
The business fetches four times this year’s expected earnings and is valued at an 80% discount to its peers.
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Capita employs 61,000 workers, and at the full-year update in March, it posted a loss of £62.6 million for the year to Dec. 31, swinging from a £272.6 million pretax profit the year before. Revenues in 2019 were £3.6 billion. At the August half-year update, profits were worse than expected due to coronavirus.
In 1984, Capita was created as part of a unit within the Chartered Institute of Public Finance and Accountancy.
Its first CEO, Rod Aldridge, led a management buyout in 1987. Lewis was drafted to the turn business around in 2017.
The business is selling some of its crown jewels to prop up its finances, and Capita is a key partner in a number of United Kingdom government contracts. Some think that it’s too strategically important to fail.
Capita provides some bespoke services that are difficult for customers to replicate themselves, but this isn’t a good time in general for support companies, as customers tighten their belts to ride out the crisis.
Lewis says that Capita has made “good progress with our transformation,” and that it has managed its way through the Covid-19 crisis.
Yet the business is having to adapt its revival plan to incorporate measures to withstand the pandemic. If anyone needs support services, it’s Capita. The stock may be one for the brave.
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