Investors in FTSE 250 professional services and outsourcing firm Capita (CPI) may be puzzled this morning, as the company’s upbeat half-year trading update failed to stem the tide of selling. Capita share price had already declined by 11% year-to-date, saw an initacial drop of 2.1p—an 11% fall—to 17p in early trading. The shares later regained some ground, ultimately closing down 1p, or 5.5%, at 18.1p.
Capita is one of the UK's largest outsourcing firms, providing a wide range of services to both public and private sector organizations, supporting their operations across various tasks and functions.
Capita’s shares have faced significant challenges in recent years, driven by declining financial performance, difficulties securing new contracts, and growing concerns over rising debt levels, which have raised questions about the company’s balance sheet. Additionally, a data breach last year further damaged investor confidence.
Nevertheless, Capita’s recent decision to cut 900 jobs and review its overall strategy and direction could potentially put the business on a more promising path moving forward.
Since the collapse of Carillion, a Parliamentary committee found that the government's main priority for outsourcing has been minimizing costs, often at the expense of contractors who are forced to take on unsustainable financial risks. This environment has weighed heavily on companies like Capita.
Capita’s shares hit a high of 795p in July 2015, but as of this week, they are languishing at just 20.26p. The company’s troubles were compounded by a major cyberattack last year, further undermining investor confidence. It has certainly faced its share of challenges.
In its latest results, released in May, Capita reported a 9% decline in adjusted revenues for the four months to April 31, driven by losses in local public services and a slowdown in contract activity within defence and education. While Capita has a solid track record of winning contracts (with a 77% success rate, though down from 80% in 2023), it has struggled to turn those wins into profitable outcomes.
A potential turning point came when Capita announced the renewal of its contract with the Cabinet Office to administer the Royal Mail Statutory Pension Scheme (RMSPS) for another six years, with an option to extend by two years, potentially increasing the contract's total value to £48 million.
But the more significant news was Capita's decision to sell its public sector software arm, Capita One, to Orchard Information Systems, a subsidiary of MRI Software, for £200 million. This move will not only bring in a £4.8 million cash dividend but also help streamline the business. The board views Capita One as a non-core operation, and the proceeds from the sale will be used to strengthen the company’s balance sheet, reduce debt, and fund its ongoing transformation strategy.
Capita’s share price took a sharp hit when news of the data breach first broke, and the fallout could continue to pose challenges in securing new contracts, as the company’s reputation has undoubtedly been tarnished. Adding to investor concerns, the revelation last month that 5,000 pension holders plan to sue Capita over hacked retirement savings data only adds to the negative sentiment. The company could also face a substantial financial penalty as a result.
The sheer scale of Capita—employing over 43,000 people—has made it difficult to maintain consistent efficiencies, and it remains uncertain whether the recent decision to cut 900 jobs will be sufficient to drive the necessary improvements in this area.
That said, there are positive signs amid the challenges. Capita’s performance in recent months has been relatively strong. A pre-close trading update for the 11 months ending 30 November, released just before Christmas, showed a 2.1% increase in revenue and a 47% jump in new contract wins compared to the previous year. Moreover, margin levels appear to be on the rise, suggesting some positive momentum.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
