What's not to like?18 Dec 2024 19:20
So what did the Capita RNS tell us in its summary (and that all a TU is, a summary)?
In brief:
Outlook for adjusted operating profit unchanged for 2024;
Cost savings target of £160m, with £140m annualised savings now actioned;
AI in service offerings, enabling cost savings target to be raised to up to £250m by December 2025;
Expect a free cash outflow2 of £120m-£140m in 2024 (before impact of business exits);
Completion of Capita One disposal in September 2024, c.£180m net proceeds received, providing funding optionality;
2024 year-end net financial debt to adjusted EBITDA, pre IFRS 16, expected to be less than 1.0 times; and,
Confident in delivering its 6-8% medium-term operating margin target.
The downside? Revenue is down 8%.
Revenue is down by a piddly 8%. Boo-hoo. So what? Who cares? Revenue is vanity, profit is sanity.
AH has made it clear that Capita's priority is investment in AI and technology, and that these will create efficiences, which in turn create better service levels and profit margins. This is investment into not only the 'here and now' but is an investment into the future.
At the moment, Capita is correctly focused on current contracts and investment into those key areas to improve margins on exisiting contracts, rather than chase new business at low margins. That is smart.
Obviously Capita's corporate and government sales pipelines will be geared correctly towards Capita's new strengths and AI and technology service propositions.
Many investor friends of mine on here (well those of you whom I let into my inner circle) know that JO is a banker (no not a Branch Manager at Natwest). For me, the key line is that is debt is expected to be less than 1.0 times. What does this mean? In simple terms, this means Capita is very, very low risk. Or another way to look at it, Capita is very, very healthy. This indicates that Capita is generating enough cash from operations to cover its debts as well as have excess funds for other purposes such as investment into technology and AI. If it's lower than 3, then a company is doing well in managing its debt load. Capita is at less than 1 times! This means Capita can invest with it's own cash into the business, with no need to borrow. No need to borrow means that more money is available to invest and grow, and eventually (long-term) hand out to shareholders.
For me there are lots of positives for Capita, and it is a no brainer investment at the current cheap share price of circa .147p per share.
AH is no fool. He has been at the Capita helm for only 12 months. He has appointed excellent management and the prospects here are good, very good. I've been involved and invested in plenty of turn-arounds, and this is a definate turn-around, no doubt about it.
My advice is to look beyond the 'here and now' and look at Capita's current market value at a mere £247 million. That, my invested friends is chicken feed.
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