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Capita looks cheap but challenges remain, says Shore Capital

Capita (CPI) may be talking up its earnings prospects, but Shore Capital is cautious about the challenges it faces.

Analyst Robin Speakman retained his ‘hold’ on the outsourcing giant, which was trading up 7.4% at 268p on Tuesday afternoon. This followed its half-year trading update, which came in in-line so the group did not make any changes to guidance.

Capita continues to focus on reducing operating costs, but Speakman highlights the ‘challenges of pay awards and employment taxes, particularly in the UK’ in 2025 and 2026. Although he is encouraged by the sales pipeline, he remains cautious on ‘how government public spending plans pan out in actual contract volumes’.

Capita is confident in achieving earnings margins of between 6% and 8% in the medium-term but ‘the challenges in achieving this remain evident to us’, said Speakman, as negative free cashflow continues through full-year 2025.

‘We believe that forecasts are set to remain subject to volatility and uncertainty,’ he said.

‘That said, in the longer term post full-year 2026, we believe that Capita remains on track for improvement and that the fundamental valuation is inexpensive.’