Capita Share Chat (CPI)

My biggest fear about the Capita results would be that the business disposals were made just to prop up a loss making company. It would have seemed at that point this business would be largely doomed. These results are critical to understand the turn around process , taking away the disposals the company has still become profitable with the cost reduction programme only partially implemented the additional disposal of Capita One to reduce pre IFRS debt to virtually zero in Q3 and the fundamental culture change to bid for profitable contracts not revenue based ones is exactly what was needed - after all revenue is vanity, profit is sanity.

This business needed to cut costs, reduce debt and focus on profits and it’s done exactly that.

The share price tanking either is a result of heavy market manipulation , reactions from people that don’t understand the company or an indication that the results are hiding a dark secret that for some reason I am unable to see …. Any thoughts on that.

For me the drop in share price is probably a good and last buying opportunity as this time next year we should be looking at a company making 300 million EBITDA , be debt free and begin to be able to make dividend payments. This company is looking at a valuation of less than 2 x it’s current EBITDA in a sector that should be 10-18 times.

The company seems to be despised by the City and we can understand why, based on past performances but if things continue in this direction at the very least it will become a target for a takeover.

This has been a long long slow and painful process with Capita but as far as I can see the recent results are everything I have wanted to see, if the price goes lower and lower now probably that is a very good opportunity for long term investors to top up their portfolio.

Kevin, I'm no economics whiz kid but I've been going over the latest figures for the past few hours and my conclusion is the same as yours. It's also what AH told us would happen. The only concern I have is the fairly hefty reduction in contract wins:

"Contract win rate of 48% versus 63% last year, partially reflecting our focus on ensuring contracts are bid at an appropriate margin in line with the Group's medium-term operating margin target."

I am left wondering if that signals us as being too expensive? If not, any thoughts on the reason behind that drop?

PJT12

Loss of revenue

The main loss of revenue stems from the exit of the network business. With the introduction of new network technologies such as SDWAN this is the right decision for Capita. MPLS as a technology migrating to SDWAN will leave other small suppliers such as Maintel, struggling to compete. SDWAN uses internet connections and unless you are tier 1/2 it is impossible to compete. With Cloud based services mainly migrating to SDWAN this was a no brainer devision. Thats why SWAN went to BT!

Look at the tech look at the direction of travel. Capita have it right.

Simpiles, it was the poorer strike rate rather than the loss of revenue which left me wondering.

PJT12. The reduction in wins is really what would be expected if they increase their margins and exactly what is necessary.

Regarding the share price it doesn’t make sense based on company results but there is an increasing seperation these days between speculation / manipulation and reality.

However eventually this business should post results that are not influenced by interest payments , and profits will rise. As and when that happens then dividend payments should be paid , given the massive undervaluation of Capita those Dividends could be 20 percent of the current market Cap. Quick math current EBITDA 200 - get to 300 with increased cost cutting as planned - and a bit of luck , with no interest payments you are looking at tax and depreciation coming off that number. So let’s say we can conservatively get to 150 reported profits after tax in 12-18 months. If they pay 35 percent in dividends that could be 50 as a distribution for a company with market cap at 280 odd currently. Hard to see how the share price could be kept low under these circumstances. But you know anything can happen, results have been and could still be manipulated , the share price we believe reflects the true valuation of a business yet the evidence shows us this is almost always not the case.

Anyway let’s see what happens

Simpiles. Thanks for the clarity and detail. It’s interesting.

Many thanks for the response, Kevin.

Simpiles, to elaborate for the uninitiated such as myself........

https://www.cisco.com/c/en/us/products/routers/what-is-the-difference-between-sd-wan-and-mpls.html#~q-a

PjT12

Your right As an out and out Techie I realise that I talk a different language to most people here. I should have included a technical debrief such as the one you have included.

People do not understand the changes that are taking place at Capita. Most of its competitors are nowhere in competition. This was something the techies at Capita were pushing for years held back by John and his management team. AH is the real deal a technical evangelist.

Remember the advert building the aircraft whilst it is flying!

Thats what AH is doing!

DYOR

Interesting analysis and numbers KevinC and I agree the mcap looks far too low given where reported profits can potentially go over the next couple of years and to a lesser extent where they already are now.

One small thing though is that interest will not go to zero even if the debt disappears as part of the interest number (nearly half at present) comes from how the cost of leases are reported so they need to remain part of the bridge from EBITDA to reported profits (along with the part of the lease cost that goes through depreciation). Or you could start with the lower pre-IFRS 16 EBITDA figure (around £150m) and then you don't need to take off anything for lease costs to get to reported profits.

Regardless, as you say, there is good reason why the sp should increase ASSUMING the company can keep the momentum going so that the profit line really starts to highlight the gap between the 'true' value of the business and the sp.

simpiles, many thanks, this is really useful. i can relate to what you're saying to a certain extent as i used to work in radio as one of the 'pain in the ****' presenters, at least as far as the engineers were concerned :-) "sd-wan is an evolution in connectivity" - which in itself must have really frustrated the techies who've known and pushed for this. can i ask how you know about this in relation to capita? hope it's not a dumb question!

Its no secret

I am now ex capita.

I worked in a technical team one of the best in the uk.

Worked on so many large projects in the UK.

Responsible for Technical Network patents in UK and US

Worked in most of the major IT companies in the UK

Now retired!

@Simpiles, i read your mini CV with interest. Excellant! I really enjoy your comments and ask that you keep them coming. Especially useful for the more, shall i say, less 'techie' members as my good self. Most appreciated friend......