Capita (CPI): what's it worth?

[Asagi]

Capita (CPI) is the UK’s leading provider of technology enabled customer and business process management services and integrated professional services.

The company has been around for a generation (at least?) and to the best of my recollection is a previous FTSE 100 constituent. Capita is profitable and dividend paying. The shares today trade at a 12 year low.

Market cap: £2.5bn
Bid:offer 387.8p:388.1p
P/E (historic): 7.9
P/E (forecast): 7.9
yield (historic): 8.0%
yield (forecast): 7.7%
Net debt: £2.2bn
Book value per share: -111p (MINUS 111p)

Year end: December

in the last twelve months, the consensus forecast EPS number for 2017 has fallen from 60p per share to 50p per share. Given that the company has not advised against that 50p EPS consensus, we can reasonably expect that it is indeed nailed on for 2017.

I expect that the forecast dividend cut includes some estimates of a more dramatic reduction. My fear is that we will get the forecast earnings met with 2017 results but a substantial dividend cut. How likely? I'm not sure. It also feels like we are close to the point now where a dividend cut would be cheered by the market, provided there were some other signals around action being taken.

On the face of it, Capita's greatest strength is the cashflow track record. According to my stats, it produced 61.5p of free cashflow per share last year and 41.5p the prior year. The consensus forecast is for a 30.5p dividend.

Capita is a big supplier to government and such outsourcing is a major global trend. While Carillion's demise will force a reappraisal of such relationships, could it lead to a less competitive market?

Regards,

Asagi (no position)

[SwissPaul]

Some NHS hospitals in Merseyside binned them as they really fouled up on the recruitment / HR side of things.

Colleagues in the forces tell me they are doing more damage to recruitment than the latest recruitment campaign and the Taliban.

From a personal POV they are in bargepole territory for me.

[nigelpm]

As I posted on ADVFN:


This has got one of the most hideous balance sheets I've seen in a while.


Capita : Net liabilities at end June 2017 were £668.3m (H1 2016: £552.9m). This includes significant deferred income balances recognised on the adoption of IFRS 15, as explained in Appendix 2.

Net debt at end June 2017 was £1,596m (H1 2016: £1,901m). This included £1,568m outstanding private placement bond debt, of which £90.3m matures in the next 12 months and the remainder at various maturities to 2027. In addition, we have £620m of bank debt which matures in 2018 and 2019, and an undrawn £600m revolving credit facility of which £81m matures in August 2020 and £519m in August 2021.

At 30 June 2017, our net debt to annualised EBITDA1 ratio was 2.9 and annualised interest cover1 was 7.8 times. Following the receipt of proceeds from the disposal of our Asset Services businesses and expected cash flow in the second half of the year, we expect leverage to fall to around the bottom of our 2.0 to 2.5 times range at the end of 2017. Subject to the completion of this disposal, we may choose to unwind our receivables financing which was a balance of £120m at 30 June 2017 and, in conjunction with the impact of IFRS 15 upon contingent obligations under bonds and guarantees, this may result in leverage being around the middle of our range.

Going to need strong support from the banks.

[Asagi]

Excellent, Nigel, thank you.

I have bought the shares but they are a worrying hold!

I think that the debt figures need to be considered in the context of cashflows and the surety of those going forward. For a start, there is

Disposal of our Asset Services businesses for £888m to Link Group, expected to complete in Q4 2017

and

Free cash flow before non-underlying items £179m

in just the first six months of 2017. The banks will certainly remain an important 'supplier' to the company but the sale of the Asset Services group means that any such strong support will not be required imminently.

Or am I reading this wrong? Look forward to further discussions.

Asagi (long CPI)

[nigelpm]

No, the cash flow has been strong - I don't see it going bust anytime soon I'd just worry as a holder that there is no downside protection if something goes awry - and given the number of contracts they are involved in that's certainly a possibility.

Not one for me at all.

[dspp]

There is a reason many refer to it as 'Crapita'.

(but where there's muck there's brass .......)

Not one for me.

dspp

[Asagi]

Going to need strong support from the banks.

Well, nigelpm, wrong there

You called everything else though so that's one for you.

Asagi (long CPI)

[nigelpm]

Good update I thought to save it from bankruptcy.

However equity is going to get pummelled particularly with a rights issue on the way.

Could however be a great recovery story if the board can execute it.

[Alaric]

However equity is going to get pummelled particularly with a rights issue on the way.

Despite being awarded lots of public sector contracts, it's never had a good name for quality of service.

Today's story
https://www.theguardian.com/business/li ... iness-live

The dividend is suspended and the shares are 30% down.

[scrumpyjack]

and then there's the pension deficit as well. £380 million but they're doing the triennial review now so it will be a lot worse than that.
One can see the whole rights issue proceeds just going to plug that and the political hoo ha means they probably can't resume dividends until the deficit is cleared.

Another Neil Woodford disaster!

[Bouleversee]

and then there's the pension deficit as well. £380 million but they're doing the triennial review now so it will be a lot worse than that.
One can see the whole rights issue proceeds just going to plug that and the political hoo ha means they probably can't resume dividends until the deficit is cleared.

Another Neil Woodford disaster!

Which of his funds? Presumably not Patient Capital, which I hold? Hope he doesn't transfer the holding there; one will certainly need a lot of patience before seeing any returns on Capita. If I held, I wouldn't be rushing to take up rights.

[scrumpyjack]

No not in Patient Capital. Citywire report as follows:

Woodford has been a long-term backer of the company and holds the stock in his Woodford Equity Income and Income Focus fund.

Woodford Investment Management said in its latest update to investors in the Income Focus fund that he had bought more shares in the group in December, despite acknowledging the potential threat to the dividend, which amounted to 31.7p last year.

'With a new chief executive now in place, clearly that eventuality cannot be completely ruled out, but having met Jon Lewis during the month, we are reassured that decisions around capital structure and the dividend will be informed by a clearer long-term strategy for the business, something we expect to hear more about later this year,' it said earlier this month.

Woodford holds 0.9% of his £8.3 billion Equity Income fund in the stock, and 1.4% of his smaller Income Focus fund.

His successor at Invesco Perpetual, Mark Barnett, meanwhile holds Capita in his £10.3 billion High Income and £5 billion Income funds.

[Bouleversee]

So I shouldn't reproach myself too much if I get things wrong! If the fund managers/institutions can't see what's coming, how can I hope to?
I've just woken up to the fact, thanks to your post, that the ISA I inherited contains the Invesco fund so I do indirectly own some Capita.. Must check how it's doing overall. Is it possible to find out all its holdings?

[Alaric]

Is it possible to find out all its holdings?

The holdings are listed in the annual report, but the most recent is February 2017.

trustnet.com is a source of these.

[gbjbaanb]

How on earth can you buy more of a stock that is going to have a rights issue and undoubtedly cut or cancel it's dividend... as part of an income fund?!

Growth maybe, value probably, income.... eh?

[Dod101]

Ouch! I hold some indirectly through Edinburgh Investment Trust, managed by Invesco. It is though a relatively small holding.

Dod

[Bouleversee]

How on earth can you buy more of a stock that is going to have a rights issue and undoubtedly cut or cancel it's dividend... as part of an income fund?!

Growth maybe, value probably, income.... eh?

Has anyone said they were considering doing so?

[Alaric]

The most recent accounts are as at 31st December 2016.

Out of almost £ 6,000 million of assets in the balance sheet, £ 2,754 are "intangible". £ 2,175 million of this is identified as "goodwill" and analysed by division.

They state

Goodwill acquired through business combinations has been allocated to Cash-Generating Units (CGUs), for impairment testing purposes, on the basis of the expected benefit that will accrue to the individual CGU through synergies realised from the acquisition and integration with the Group as a whole. These represent the lowest level within the Group at which goodwill can be allocated on a reasonable and consistent basis.

[gbjbaanb]

How on earth can you buy more of a stock that is going to have a rights issue and undoubtedly cut or cancel it's dividend... as part of an income fund?!

Growth maybe, value probably, income.... eh?

Has anyone said they were considering doing so?

Perhaps I should have quoted the relevant bit in scrumpyjack's post:

Woodford Investment Management said in its latest update to investors in the Income Focus fund that he had bought more shares in the group in December, despite acknowledging the potential threat to the dividend, which amounted to 31.7p last year.

[SwissPaul]

Stupid question but when is the divvi?