Capitais Britain's largest provider of business process outsourcing, with a 23% market share. It offers call centre, administrative, recruitment, financial, IT and property consultancy services, split half and half between the public and private sectors.
Clients hand over their non-core operations to Capita, which integrates them with similar outsourced activities from other companies, to cut costs and improve overall service. For instance, it recently renewed an eight-year contract with the BBC, worth £560m, to manage its TV licensing obligations. This should save the broadcaster £220m over the term of the agreement.
Since the 2010 general election, these types of deals have been thin on the ground as the new government initially stalled on key decisions. This gridlock has caused a 7% fall in Capita's organic growth. But this is offset by a favourable 14% tailwind from acquisitions. So sales are still set to rise 7% in 2011, with EBITA margins stable at 14.4%.
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The good news is that parliamentary foot-dragging is ending, and orders are starting to get signed. In the first half of the year, Capita bagged £1.1bn of new work, double the amount in the first half of 2010, after securing deals with Zurich (£570m), the Teachers' Pension Scheme (£80m), MetLife (£149m) and the DVLA (£100m). With a £4.7bn order pipeline, chief executive Paul Pindar aims to grow sales by winning 50% of all bids submitted.
Longer term, the firm's prospects are bright. At a recent Cabinet Office conference, officials pointed towards another £40bn-£50bn of contracts being tendered in IT and facilities management alone by 2016. Capita also enjoys ongoing income from IT consultancy, surveying, share registration and software services.
Capita Group (LSE: CPI), rated a BUY by Collins Stewart
The City is forecasting 2011 turnover and adjusted earnings per share (EPS) of £2.9bn and 48p respectively, rising to £3.2bn and 52p in 2012. The shares trade on a historically cheap price/earnings (p/e) ratio of 13.3 and pay a 3.2% dividend yield. I rate Capita on a forward EBITA multiple of 13. Adjusted for proforma net debt of £1.2bn, that generates a fair value of 750p a share.
The main risks include pricing pressure as customers demand more for less. There's also the danger of government interference, and problems with project execution. But productivity improvements should offset any future margin squeeze and, given its scale, Capita should be able to extract savings from its recent bolt-on acquisitions. Broker Collins Stewart has a price target of 900p. The company's fourth-quarter results are due out on 23 February.
Rating: BUY at 645p (market cap £4bn)
