Exane flags concerns around earnings quality at Capita

In particular, analysts George Gregory and Henry Naish took issue with the outsourcer´s accounting treatment for non-underlying software & license amortisation.

Following a meeting with the company´s finance chief, Nick Greatorex, the analysts said Greatorex´s efforts to reduce the tendency towards high accruals upon acquistion and for cutting accrued income were "encouraging".

Nonetheless, "earnings quality has remained weak and meanwhile both on and off-balance sheet liabilities have continued to rise, pointing to a concerning imbalance," Gregory and Naish said in a research note sent to clients.

So while Capita shares were trading at a discount versus peers in terms of their price-to-earnings mulltiples it was simultaneously - and with few exceptions - changing hands at a premium on the basis of its enterprise value/unlevered free cash flow.

Exane downgraded shares of Capita to 'underperform' from 'neutral' but stuck by its 1,050p target price.