Stockopeda6 Mar 2024 11:26
These results are even more complicated than I expected, with lots of moving parts.
My overall impression of Capita is that it’s a large, sprawling group of mostly low-margin support services businesses. Many of the revenues are likely to be “sticky” (think of long-term government contracts) but at the same time the prospects for growth are limited.
The shares are “cheap” but the true enterprise value is probably around £450m (adding £180m net debt to £270m market cap). With another large free cash outflow expected this year, I expect debt to rise again.
So then it becomes a bet on what the company will look like in 2025, with the hope that performance will be transformed by all of the business disposals and cost cuts.
I’m taking a neutral stance on this share.
I can’t take a bullish stance because the hole in the balance sheet (in terms of negative tangible value of minus nearly £500m) suggests to me that it could take several years of good performance before the company is on a truly sound footing.
I don’t want to take a bearish stance because the leverage multiple of 0.9x or 1.2x, depending on how you look at it, is not currently distressed. Although it could become distressed this year, depending on how bad the outflows are.
I also don’t want to take a bearish stance because I’d like to think that the £160m of total planned efficiency savings will transform the company’s financial performance, and that the new CEO will simplify and improve the overall structure of the group. Given these possibilities, this is not a stock that I would want to short.
Overall, therefore, neutral seems to be the safest and most sensible option.
https://app.stockopedia.com/content/small-cap-value-report-wed-6-march-2024-cpi-pfd-imm-lsl-991325?order=createdAt&sort=desc&mode=threaded
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