Jefferies hikes Capita target price, sees improving risk/reward

Analysts at Jefferies upgraded their recommendation on shares of Capita citing evidence of change under its chairman, despite the lack of a chief executive officer.

"Recent events at Serco and MITIE suggest that a new CEO could remove significant cost if organisational complexity is reduced - Capita has a reputation for running operating units on a stand-alone basis so there may be considerable duplication," analysts Kean Marden and Will Kirkness said in a reserch note sent to clients.

In their opinion, equity markets appeared willing to back management turnarounds at a very early stage.

Linked to the above, while a UK in perpetual political turmoil meant trading would remain difficult, lowly valuation multiples meant scope for self-help was "underappreciated".

"Capita is deeply unloved but risk/reward is slowly improving," the analysts added.

In particular, Marden and Kirkness highlighted the shares' 5% dividend yield and 7% free cash flow yield.

Should the outsourcer's earnings per share and free cash flows stabilise those should offer "considerable upside", they said.

Against that backdrop, Jefferies revised its estimate of total proceeds from the sale of Capita Asset Services and Specialty Recruitment from £740m to £775m.

That would help to lower net debt as a proportion of EBITDA to 2.1, versus the 3.0 ceiling in its debt covenants, the broker said.

Nonetheless, ahead of the 30 June covenent test, the company's balance sheet remained a "key risk", it said.

On a brighter note, the analysts added: "If the CAS disposal is well advanced then we think a breach would result in compensation to note holders rather than an equity issue but we are mindful that delayed interims provide the flexibility for Capita to discuss options with shareholders."

They upgraded their recommendation on the shares from 'hold' to 'buy' and raised their target price from 465.0p to 750.0p.