ShoreCap downgrades Capita, cites impact of NICs changes

The broker said the processed based outsourcer is "materially" exposed to the UK and to public sector support contracts in particular.

"Capita has begun to emerge from its long period restructuring with non-core businesses disposed and its balance sheet all but deleveraged, emerging in our model with circa £17m net debt (ex-leases) going into FY25F, with a promise of positive cash generation to emerge," it said.

"We downgrade our earnings per share forecasts by 45%/39% for FY25F/FY26F to account for the potential negative impact of changes to NICs.

"Ahead of detail and guidance on this from Capita, we move from buy to hold."

Capita is yet to comment on or give guidance on the likely impact of NICs changes from the UK Budget to take effect from April 2025, although Shore noted the "helpful" commentary from peer Serco on 8 November.

"We expect a similar commentary to emerge from Capita in due course, although with a larger impact on group profitability reflecting its greater exposure to UK Government."

Shore estimated that around 60% of Capita’s group costs are UK employment, with a high proportion of salaries rising from moderately above living wage levels, so seeing a high potential impact from the increase in NICs rate and lower payment threshold, as well as the 6.7% living wage increase.

The broker said it expects it to be difficult to immediately pass on higher costs, other than wider inflationary linked costs. It noted that Capita’s 2024 pay negotiations with unions have been deferred to the New Year to allow additional costs to be managed.

"Capita does now have visible financial resources to see the group through to self-funded development, and back to economic margins as contracts roll-over," Shore said.

"We feel that recouping additional costs with higher risk-based pricing may be unpalatable to Government clients, so potentially a smaller market opportunity may be evident in the future."

At 1105 GMT, the shares were down 4.2% at 16.51p.