RE: Accumulating7 Mar 2024 14:05
Hi AimMaster2018. I'm watching cpi very closely. Not sure yet.
[Capitalising on a more streamlined business]
7 March 2024 [Read this Edison Quick report]
Click and view it online for free https://t.ly/2VFb0
Capita faced numerous cash drags in FY23, notably £20m in costs
associated with a cyber incident, a £30m pension deficit contribution and a
£20m increase in technology capex, which depressed the adjusted free
cash outflow before disposals to £116m (£42.4m outflow in FY22). Despite
these challenges, the implementation of a rigorous cost efficiency
programme and the strategic divestment of non-core assets have the
potential to fuel a turnaround. Some £160m of annualised cost savings are
expected to be realised by mid-2025 (part reinvested for growth), aimed at
bolstering a significant improvement in operating margins. As margins
improve, shifting to faster-growing market segments with a more
competitive cost base could catalyse a reduction in the valuation discount.
FY23 faced with numerous obstacles.
FY23 results appear severely depressed, affected by one-off items of £42m in
goodwill impairment on business exits, £25m in cyber incident costs and £54.4m in
cost reduction expenses, with EBITDA decreasing 39% y-o-y to £144.5m and a
reported loss before tax of £106m (FY22 PBT: £61.4m). Nevertheless, these costs
mask the underlying growth in contracts such as Personal Independence
Payments, alongside a commercial settlement, with adjusted, continuing PBT
increasing 14% y-o-y to £56.5m. The company saw sustained contract momentum,
with a year-end total contract value of £3.1bn (FY22: £2.6bn); key contract wins
include a 10-year contract to manage the Civil Service Pension Scheme and
incremental scopes of work to deliver the FAS and the DSA.
The road to positive sustainable cash flow Capita is undergoing a transformation phase,
with the completed sale of its 75%stake in Fera Science for £62m in cash, marking the final
disposal of the Portfolio division and enabling the streamlined business to focus on its two
core divisions. In addition, in FY23 Capita paid £30m of regular pension deficit contributions
and will pay a further £21m in FY24, with zero payments in FY25 and beyond. Its rigorous
cost restructuring programme, which aims to save c £160m on an annualised basis
(£60m to be delivered from Q124 and an incremental £100m by mid-2025, part of
which will be reinvested for growth), should support significant margin recovery.
Valuation: Seeds sown for a potential recovery. A substantial downward trend in EPS has
driven Capita’s share price to fall c 90% since January 2020, currently trading on a consensus
2025e P/E of 3.6x (a c 60% discount to peers). Its extensive cost restructuring programme, and
now more streamlined business model, could catalyse a reduction in the valuation discount.
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