Capita climbs as turnaround continues, new CEO shortlist drawn up

Capita has reported "good progress" on its restructuring and said the turnaround of IT Services was progressing better than expected, three months after its chief executive resigned and the outsourcing group was dumped out of the FTSE 100.

While the search for a new CEO is still only down to a final shortlist of candidates, new management appointed at divisional level are bedding down well nuder the new group structure and the performance of its trading businesses since the start of 2017 has been in line with expectations.

Both IT and Continental European businesses were said to improving but somewhat offset by a lack of improvement in property, education and benefits consulting.

Stressing that this remains a transitional year, Capita said the first half performance of 2017, including the impact of higher resourcing costs from the NHS Primary Care Support England contract, will be "no lower than the second half of 2016", with the current year reported under IFRS accounting standards and the previous under GAAP, excluding the write-down of accrued income and potential impact from disposals.

Ahead of its annual shareholder meeting on Tuesday, the company said the disposal of specialist recruitment businesses have been completed and the sale of the higher margin Asset Services business was said to be on track for completion in the second half, which should reap proceeds of around £800m, net of costs, to help significantly reduce debt.

Cost-cutting measures including trimming overheads, offshoring some IT support, centralising more procurement and rationalising the property estate were also said to be on target.

Major contract wins and extensions of existing contracts have reached £318m in aggregate value in the first half so far and so the bid pipeline remains flat at £3.8bn.

"We are seeing good levels of activity in the private sector, particularly in financial services, transport and telecoms. In local government, we are also bidding on a number of opportunities where we can deploy high value, replicable solutions in areas such as asset optimisation, digital transformation and procurement management services," the company said.

It also confirmed talks with British Airways about potentially providing its global customer contact operations, which currently handles around 9.5m calls per year, though no final decisions have been made.

Shares in Capita climbed 13% to 622p, the first time it has topped 600p since last October.

Business performance and larger contract wins "looks mixed" said analysts at Shore Capital, reckoning major contract wins and extensions of existing contracts is "potentially well below the likely revenue replacement rate for the group for the period".

"We remain cautious on Capita’s prospects going forward, though we accept that further news on disposals and cost reduction are likely to be taken positively. We see a tough environment for the group continuing," ShoreCap said, reiterating its 'sell' rating.

RBC Capital Markets, which saw the update as "a bit of a holding statement", noted the move to IFRS accounting will be marginally positive for the first half of the year and that trading remains mixed, with the win rate has improved to one in two.

RBC said it will not be changing forecasts on the back of this announcement.

"The fact there is no real new negative news and that it appears IFRS15 will not be a major negative will probably be the focus for the market today," analysts said.

While the stock still looks "headline cheap" at a p/e ratio of 11 times expected earnings, "risks remain high - the appointment of a credible new CEO and the sale of CAS are now be key catalysts for the business".