Capita 'too opaque' for recovery bet, say Jefferies, Deutsche

Capita could be an "interesting recovery story" but the shares were downgraded by Jefferies as the business is "too opaque" for analysts to produce proper forecasts, while Deutsche Bank said the size of the rights issue and disposal process both looked "too small".

Jefferies, casting a critical eye at "unreliable" management guidance after another profit warning from the government and private sector outsourcer a day earlier, and the weight of "perpetual UK political turmoil" on the revenue outlook, downgraded the shares to 'hold' from 'buy'.

There tail risk of a Labour government "is likely to weigh on sector valuation multiples", too, the investment bank said.

Although the new chief executive Jon Lewis's plans offer potential for a turnaround, it is "too early" to assess whether the kitchen sink has been thrown in, or whether there may be another profit warning to come.

On Wednesday Capita revised is full year PBT to £270-300m driven by a reduction in margin from circa 11% to 8.0-8.5%.

The FTSE 250 outsourcer's statement highlights contract attrition, though revenue is stronger than expected, and unquantified investment costs, "but sheds little light".

"The new CEO may have kitchen-sinked expectations and front-end loaded investment costs but it’s difficult to prove at this juncture."

Analysts at Deutsche Bank cut adjusted PBT forecasts to £277m from £397m and those for 2019 to £274m from £411m, suggesting that it is possible Lewis may generate further cost savings but he was not getting the benefit of the doubt that these will positively impact profitability in 2019.

"Such is the scale of the revenue drift down and the lack of end market growth, combined with the likely reticence of public sector clients in particular to contract with them (post Carillion) that we do not believe the company will be in a position to show growing profitability until into 2020 at the earliest."

DB estimated a rights issue may be higher than the £700m management suggested as the disposal process "sounds smaller than hoped".

"We believe that the company probably needs to shrink by 30% at least. In the long run it is difficult to see the company remaining an independent standalone entity in its current form. We expect that this is another stage in the long run breaking up of the business."

DB, which remained at 'hold', reckoned it will take some time for value to re-emerge "and in our view, it would be difficult for larger parts of the business to be acquired prior to any restructuring by Capita".