Capita rallies after Woodford talks his own book

Shares in Capita rallied on Monday as a blog post from star fund manager Neil Woodford talked up the possibility that the outsourcer's low valuation could make it a big target.

In a post on the Woodford Investment Management website, Woodford, who is a big shareholder in the group, said, "There are of course buyers of corporate assets that are not disciples of the momentum school of investing - I suspect that other businesses and private equity buyers will be circling Capita as I write."

Woodford, the third-largest shareholder of Capita through his £7.7bn Woodford Equity Income and the £690m Woodford Income Focus funds, said he would not be selling his holdings in the company despite continued profit warnings in recent years and a drop of as much as 45% to its share price on 31 January.

He said there was "a clear plan and project underway" at Capita to turn it around.

"I would go as far as to say that the business will be in better shape at the end of 2018 than it was in 2016," he said when discussing a profit warning issued by the group in December 2016.

He said, "It will have infinitely better leadership, a stronger balance sheet, better cash flow, more conservative accounting policies and a lower pension deficit.

"The mistake I have made, albeit I didn't know it at the time, was in owning Capita in 2016. It is not a mistake to own it now. And so, I will not be compounding the previous error by behaving in an irrational and valuation insensitive way now," Woodford added.

Woodford did not deny that Capita had been "a poor investment" but noted that it "is one that has the capacity to become a significantly better one from here."

"Discussions with all major customers have gone very well as have conversations with the Cabinet Office. The collapse of Carillion has catalysed the whole outsourcing sector to rebase its relationship with the Government, which also recognises the need for change, to reflect a fairer balance between risk and reward," Woodford wrote in his blog.

As of 1300 GMT, shares had gained 6.59% to 173.00p.