Capita drops on disappointing revenue outlook - UPDATE

Capita, the FTSE 100 business outsourcing company, was the worst performer on the blue chip index on Friday, after saying it expects to see organic revenue growth decline 7% in 2011.

Just to put that into perspective, if a major retailer reported a like-for-like sales drop of 7% investors would not be happy at all.

Capita has, however, derived 14% growth from acquisitions which will boost the reported revenue figure by 7%. The company, which runs Britain's TV licensing system and the Criminal Records Bureau, also says margins will remain stable on 2010.

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Capita claims its bid pipeline is strong and describes 2011 as likely to be its best ever in terms of contract wins, surpassing the £1.89bn delivered in 2007.

This year some of its new contracts include the administration of the Teachers Pension Scheme for seven years and managing vehicle tax and insurance evasion for the DVLA.

Nevertheless, the firm does admit that "progress is somewhat counterbalanced by the prevailing pressure on spending which continues to affect adversely a small number of our trading activities and is also constraining discretionary additional revenue from existing clients."

Shares were down 4.04% to 640.5p by the afternoon (14:25).

Shore Capital reiterated its sell rating on the stock. The broker notes that Capita is trading at 13.7 times prospective earnings and 12.5 times forward earnings, and while "this appeared fairer value in the past", it still sees risks to forecasts from "contract hiatus and contract terms".

Investec analyst Robert Morton said, "Although the shares have underperformed the market recently, we would expect them to go easier on today's announcement and remain out of favour until the news flow improves."

BS & BC