Keep it simple, HSBC tells Capita as it upgrades to a 'buy'

HSBC upgraded Capita to 'buy' from 'hold', despite the question marks surrounding its complex business model.

In a letter to Capita's yet-to-be-named new chief executive, HSBC stressed the need for the business process outsourcer to lay out plans to simplify its business and to deliver upon them.

"Capita is a good business, it creates process solutions for the public and the private sector, and there will be demand. Focus on de-cluttering, simplifying, and understanding the risks inherent in long contracts, and complex accounting," the broker said.

Ex-CEO Andy Parker stepped down in March as Capita exited the FTSE 100 index, with the outsourcing firm having seen its market value drop 36% in the last year as cost over-runs, delays and asset writedowns piled-up.

Nevertheless, the business still offered value, the analysts said.

"A new CEO articulating a sensible plan, and returns helped by write-downs, stabilising and the market seems likely to give the benefit of the doubt."

Long duration contracts had the benefit of rendering the industry more 'defensive' than broader industrial companies.

However, they also made evaluating a company's chosen strategy that much harder, HSBC said.

Indeed, following Capita's troubles in 2016 investors had been left wondering whether long contracts for complex services were not increasing risk in unexpected ways.

HSBC increased its target price for the shares from 590p to 820p, which meant they were offering upside of 22.3% from their closing price of 671p in the previous session.

Capita’s stock was boosted 1.93% as of 12:15 BST on Wednesday off the back of the upgrade.