Capita knocked lower by Deutsche Bank downgrade
Capita was under pressure on Thursday after Deutsche Bank downgraded its rating on shares of the outsourcer to ‘sell’ from ‘hold’.
Capita
13.20p
16:40 25/04/24
FTSE 250
19,601.98
17:09 25/04/24
FTSE 350
4,434.34
17:09 25/04/24
FTSE All-Share
4,387.94
16:49 25/04/24
Support Services
10,523.75
17:09 25/04/24
The banked noted the 15% rise in the share price since the election results and said that while a 5-year Tory government is a "theoretical positive", UK outsourcers have generally fared better when the government has increased spending materially as a proportion of GDP - something that is unlikely to happen.
Deutsche pointed out that under the Conservatives' spending plans 2023-24 departmental spending is due to increase by 11% over the four years from 2019-2020 or a compound annual growth rate of just 2.6%.
"This will barely lead to any increase in spending to GDP, and outside of Health the increase is closer to only 1.5% and is front-end-loaded," it said.
DB, which lifted its price target on the shares to 155p from 140p, said that while the fiscal backdrop is helpful, there will be no sea change in expenditure, "given we are only modestly below the 50-year average of government managed spend to GDP".
"To believe a Conservative government will materially increase this, even given the likely political imperative to support new Conservative voters in previous Labour voting constituencies, is, in our view, a bit of a stretch."
Deutsche Bank also argued that Capita is now priced as though it is largely fixed.
"Capita is trying to reposition itself and is midway through a 5-year transformation and at the same time is trying to hit free cash flow targets put forward at the time of the 2018 rights issue. In our view, the current valuation takes into account cost savings potential but doesn't take into account ongoing revenue risk from price deflation revenue attrition or the scale of costs we see as likely needed to create a ‘technology enabled business process outsourcing business’."
At 1020 GMT, the shares were down 4.3% at 170.35p.