Capita Share Price (CPI)

Date Time Trade Prc Volume Buy/Sell Bid Ask Value 28-Nov-12 09:22:37 761.08 100,000 Buy* 760.00 760.50 761.08k O

http://www.reuters.com/article/2012/11/27/capita-results-idUSL5E8MR8PY20121127?feedType=RSS&feedName=financialsSector&rpc=43 Capita set to win record council tie-up Tue Nov 27, 2012 11:03am EST By Christine Murray Nov 27 (Reuters) - British outsourcing firm Capita said on Tuesday it was set to win its biggest contract ever after it became the preferred bidder to run education services with Staffordshire county council for the next 20 years. The joint venture with the council is expected to generate revenues of around 85 million pounds ($136 million)a year, with Capita holding a majority stake, subject to the approval of the local elected cabinet. The news, which comes just a week after it was announced the preferred bidder for a 320 million pound tie-up to run back office functions for Barnet council, sent its shares up 3.2 percent by 1530 GMT. In a trading update earlier in November, Capita Chief Executive Paul Pindar said that he anticipated a pick up in UK public sector outsourcing as the government tried to slash costs to reduce the national deficit. Local government has been hit particularly hard in Britain's austerity drive, with all councils facing cuts of around 27 percent. "They are withering on the vine," Staffordshire council Cabinet Member for Education Ian Parry told Reuters. "But we're not saying goodbye services, we're saying hello to new investment," he added. Schools in Britain receive the majority of their funding from central government and then buy services from their local council, and Parry said that many have already been cutting back on services. Capita will acquire a majority stake in the joint venture with an initial investment of 24.9 million pounds in the first year and a further 6.6 million over the following 3 years. It hopes to generate revenues of at least 2 billion pounds in the first 10 years of the contract by offering its services beyond Staffordshire to schools across Britain. Capita beat off fellow outsourcer Carillion to win the deal, its fourth local council contract in as many months.

Capita, which has 68 per cent of its existing work pipeline coming from the public sector, says that the expected public sector outsourcing work was beginning to flow through at last. The company is back to organic growth, a 6% rise in the second half expected to contrast with a flat outcome in the first, with 7% achievable next year. Tempus in The Times says that whether that will satisfy the doubters is questionable; Capita has always been a stock that has attracted scepticism. But the rate of contract flows in the third quarter was impressive. In all, £400m was awarded and £300m from the pipeline abandoned as being unlikely to arrive; but that pipepline was little-changed at £4bn, which means potential new work arrived at a higher rate than it could be won. This may look academic, but such work flows are one of the few ways to value the outsourcing sector. Capita shares have been erratic performers this year. Down 5p at 722p, they sell on about 14 times’ earnings, or about in line for the sector, but merit only a “hold” at this level.

Prime minister David Cameron says the door to the public sector will be flung open to private sector competition. The problem is, it looks there's going to be a crush to get in and those that do make it inside might not like the slim pickings they find. While analysts expect a flurry of contracts to be awarded next year, they will most likely be at lower margins. Meanwhile, Capita's shares trade on 14 times forecast earnings for 2012. That's a premium to the support services sector average that looks increasingly hard to justify, given the falling profit margins and limited scope for Capita to grow its dividend. Ahead of the update on the 13 November,......but as always dyor and gl...

This will bring profit margins under pressure as competition increases and Mr Speakman thinks there is another dynamic at work - clients' expectations have changed; previously they just wanted to ensure the work got done, now the focus is on the cost. At the half-year stage, Capita's operating margin slipped 0.3 percentage points to 13.5 per cent, and Mr Speakman feels that, as contracts are re-bid, there is a risk margins will fall from double digits to high single digits. Capita's free cash flow is also falling - from £280m in 2009, £241m in 2010, and £157m last year - as new contracts absorb working capital. Capita won a record £2bn in new contracts and renewals last year and implementing them resulted in a cash strain. In addition, Capita's debt-to-equity ratio is high, especially as behind shareholders' funds of £793m there is £1.9bn of intangible assets, mostly goodwill from acquisitions. Capita says there is no reason to suggest any impairment of that goodwill, but, should growth slow, that could change.

Everyone was happy as its bid was around £100m less than the nearest competitor. However, the elation was shortlived, as a scathing report by the Public Accounts Committee into the debacle reveals. The contract was delivered seven months late, was plagued by IT failures and ended up costing £395m. The failures highlighted in the report were basic: a lack of proper planning, unrealistic assumptions and poor communication between contract partners. However, Capita has far more successful partnerships, as its growth over the past 20 years attests. Given these successes and the need to cut costs, outsourcing will continue to grow. In its latest annual report, Capita estimates a target market of £117bn, of which only £8.1bn is currently outsourced. So austerity will help grow Capita's share of its market, but austerity cuts both ways - it will also make the market smaller. Robin Speakman, an analyst at broker Shore Capital, says: "Outsourcing's share of the pie is growing, however the pie is shrinking".