UBS downgrades Capita, casts doubt over turnaround

UBS downgraded its recommendation on shares of outsourcer Capita to ‘sell’ from ‘neutral’ following a re-rating of more than 50%.

The bank, which lifted its price target to 140p from 130p, said: "Capita is undergoing a multi-year turnaround, but a significant re-rating through 2019 and consensus already appear to price in management achieving targets this year."

UBS said it was "doubtful" about the turnaround, adding that it still expects negative organic growth until FY 2022, which will significantly weigh on cash generation.

"We believe internal improvements will take longer than expected to translate into positive external growth, while the wider market backdrop continues to deteriorate," it said.

UBS said its latest ‘evidence lab’ analysis of employee satisfaction trends suggests internal rebuilding is going well, with Capita's score improving by around 32% since mid-2018.

However, headwinds from a worsening market backdrop may be rising. "UBS Evidence Lab CFO surveys indicate a weak UK private sector for contract awards, ii) public sector tendering pipelines remain slow, and iii) UK staffing trends suggest the outsourcing sector could see falling volume-related work until late-2020," it said.

"It took Serco six years under a new CEO to return to growth; consensus expects Capita to do the same in less than three years."

At 1210 GMT, Capita shares were down 3% at 167.20p.

Over the weekend, the Telegraph reported that it was planning a £200m sale of a clutch of businesses including translation services and events management.