Taken from Stockepedia9 Jul 2024 16:48
This was another potential turnaround that Richard Staveley also mentioned in his recent interview with Paul Hill, with all sorts of insightful comments on Capita and others. Hence I had just put CPI on my list of share ideas to revisit, so today’s news is timely. I’ve liked the turnaround potential here in the past, but shares never seemed to reflect the significant progress that’s already been made in repairing its previously over-geared balance sheet. I flagged it as amber/green here on 14/12/2023 as a potential recovery share.
Today’s disposal is Capital One, a standalone software business, that has been sold for £200m, a 10x EBITDA multiple. This will hit short-term profits (as £19m pa PBT drops out of the group numbers in future), but
“Capita is maintaining its medium-term guidance for the continuing Group based on the benefits of the cost saving and technology initiatives previously outlined.”
Requires shareholder, and Govt approval.
Paul’s view - note that Capita only had £182m net financial debt (excl. leases) at Dec 2023. So assuming no big changes, this disposal wipes out all that net debt. Although its balance sheet overall is still weak, it does benefit from getting substantial up-front cash from customers - so a favourable working capital cycle means balance sheet weakness doesn't matter that much. It only becomes a big problem if Govt decides to become a slow payer.
I would argue that since the disposal is at a valuation multiple considerably greater than CPI’s own PER of 4.5x, then that would seem to make sense, and improve the overall position for CPI.
As Richard Staveley points out, if Capita achieves its target operating margin in future, similar to what it achieved in the past before everything seemed to go wrong, then the share price could end up substantially higher than it is now. That is a big “if” though! It wouldn’t surprise me if this share doubles from here, which would only take the PER up to about 8-9x. If it then out-performs against what seems modest forecasts, then maybe more upside? Overall I see positive risk:reward here, and there will be likely loads of investors who won’t even look at Capita shares, just assuming it’s still a basket-case. Hence an opportunity maybe? Time will tell, we can’t predict the future
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