Shares in unloved support services provider Capita (CPI) climbed 7% to 49.5p after the firm unveiled a major restructuring plan involving large asset sales along with its full year results.
RESULTS IN LINE
The results themselves were in line with the expectations the firm set out at the half-year stage, with reported revenues down 10% to £3.32 billion due to contract losses and the impact of Covid.
Pre-tax losses were lower than 2019 at £49.4 million against £62.6 million, helped by cost savings, while free cash flow was higher thanks to improved cash collection and net debt was lower than expected meaning the firm’s gearing was well within its covenants.
Altogether, Capita is now ‘a much better business than at the start of the transformation, with materially improved client relationships and growth prospects’, however it was news of further restructuring which grabbed the market’s attention.
SIMPLER STRUCTURE
The firm said it would divide itself from six different businesses into ‘two core divisions focused on distinct growth markets and client needs’. Capita Public Service will exclusively serve the UK government, while Capita Experience will serve blue-chip corporates in the UK and Europe.
Any business which doesn’t fit into this framework will be hived off into a third division and earmarked for sale. In total the firm expects to raise £700 million from the sale of non-core businesses, with up to £500 million of proceeds expected this year.
Also, after having to abandon its growth and profitability targets last year, Capita is now targeting organic revenue growth this year and sustainable cash generation by 2022, which will allow it to invest in growth projects without having to ask its banks or shareholders for funds.
VALUE STOCK
We flagged the potential for Capita shares to re-rate at the start of December, with the caveat the stock was deeply unloved and there was a good deal of skepticism as to whether the company could turn itself around.
The news the firm was selling its education unit was a step in the right direction strategically, and today’s news takes that much further with a root-and-branch review of the business.
Numis analyst David Brockton, who has a 70p price target on the shares, says that while the company ‘remains far from successfully completing a turnaround, 2020 was not as bad as feared and the outlook is promising’, with a return to sustainable cash generation likely to generate earnings upgrades for 2022.
