HSBC cuts Capita to 'hold', cites too many unknowns

HSBC downgraded outsourcer Capita to 'hold' from 'buy' and slashed the price target to 200p from 640p as a profit warning and rights issue warrant more caution.

Capita has kicked off a transformation programme as part of which a new chief transformation officer has been appointed and a new executive committee has been established to implement the programme. HSBC said that until further details of the plan are revealed later this year, uncertainties are likely to keep the share price volatile.

The company is planning to strengthen its balance sheet through a rights issue and disposals and HSBC argued that uncertainty around disposals, the quantum of the rights issue and the upcoming strategy means there are too many unknowns.

"We don’t have an up-to-date annual report; many investors are likely to want a glimpse of one before buying. Auditors, too, are likely to be extremely cautious given the news flow at Capita and Carillion. What are the gross working capital balances? How are they moving? How much gross cash is there?

"What is the average debt and cash flow profile of the business as opposed to the year-end snap-shots? Is there a new debt level HM Government is enforcing to win contracts? Are suppliers pushing on payment terms in the wake of the news flow?"

HSBC said its turnaround scenario suggests the share price could more than double, over time, but it is too early to factor that into the valuation.

At 1245 GMT, the shares were down 0.6% to 196.35p.