With the Capita share price near 25p, it’s dropped by around 47% over the past year.
In fairness, the markets have been terrible and many stocks have plunged. But the business has perhaps earned the poor performance of its shares. Nevertheless, it has turnaround potential now. And I think the opportunity is worth me exploring.
Rapid rise and fall
Capita was the UK’s leading player in creating and developing the outsourcing market. And the business grew at lightning speed after emerging as a standalone company back in the late 1980s. And it diversified its services both wide and deep in the public and private sectors.
Capita seemed to be everywhere. For example, it’s had contracts such as the running of the London congestion charging zone. It’s collected the BBC licence fee, and provided electronic tags for offenders. It’s recruited for the British Army and for the NHS. And it’s been involved in many primary support services for the NHS as well as many other diverse operations in both the public and private sectors.
The share was a darling of the stock market — until it wasn’t. The company’s rapid expansion into a mind-bogglingly wide spread of services caused an apparent lack of focus. Contracts started becoming unprofitable. And worse still, Capita started mucking things up and getting things wrong with many of the services it was supposed to provide.
The day of reckoning came in July 2015 when the share price topped-out at around 800p. And that’s a lot higher than today’s 25p, which goes a long way towards telling the story of the decline of the business. Indeed, the earnings record over the past few years has been terrible. In 2016, the company posted annual earnings of just over 14p per share. But for 2022, City analysts expect a little under 4p.
Turnaround and debts
One of the outcomes of Capita’s history of ascendancy and decline is a huge pile of debt. It’s a big problem facing the current management team in their efforts to turn the business around. And the company is addressing it in part with a programme of asset sales.
One recent example is the announcement of the company’s intention to dispose of its Pay360 Limited business. And it also completed the sale of its two real estate and infrastructure consultancy businesses in September. All the money raised appears to be going towards debt reduction.
In August’s half-year results report, chief executive Jon Lewis said the company’s reputation for delivery and digital transformation services is increasing. And it’s secured “a series of important contract wins and renewals”. Meanwhile, City analysts predict an increase in earnings of around 34% in 2023 making the forward-looking earnings multiple about five.
Rising annual earnings haven’t been seen for around five years. So, this could be the beginning of a meaningful turnaround. But it’s early days. And the company has a lot of historical ‘baggage’ and debt to shift. Meanwhile, there’s no shareholder dividend.
I don’t think the Capita share price is a particular bargain when adjusting for the company’s debts. The valuation looks fair to me. And the company has much still to prove. So I’m watching from the sidelines for the time being.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022