What a week for the Capita (LSE: CPI) share price! It’s up a stunning 46.79%. That kind of performance turns heads.
Thousands of investors will be thinking the same thing: why on earth didn’t I buy Capita last week? There’s a reason for that, of course.
Capita shares have been hopeless for ages. Over one year, they’re still down 24.84%. Over five years, they’ve crashed 81.7%. Investors have lost a lot more money on Capita than they’ve made. So what went wrong?
It’s an outsourcing specialist and for many people, that will be explanation enough.
A troubled stock
Following the collapse of outsourcer Carillion, a Parliamentary committee âfound that the Government’s overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial riskâ.
Capita shares peaked at 795p in July 2015. Even after this week, they trade at just 20.26p. Last yearâs massive cyberattack didnât help. Capita has been through a lot.
Its latest results, published in May, did little to revive the share price, with adjusted revenues falling 9% in the four months to 31 April, due to local public service losses and reduced contract activity in defence and education. Capita is good at winning contracts, with a 77% success rate (albeit down from 80% in 2023). It’s not so good at making money from them.
Lift-off began after Capita announced the renewal of its contract with the Cabinet Office to administer the Royal Mail Statutory Pension Scheme (RMSPS) on Tuesday, for an additional six years from 2026. An option to extend for a further two years would lift the contract’s total value to £48m.
But the real kicker was the news that itâs selling its public sector software business Capita One for £200m to Orchard Information Systems, a subsidiary of MRI Software. First, it will bank a £4.8m cash dividend.
The board decided Capita was a non-core operation and the money raised would boost its balance sheet, pay down debt and fund its âtransformation journeyâ.
Too risky for me
The news has applied rocket boosters to the share price, but I’m not sure it will continue to fly. Full-year 2023 results were a sluggish affair, with adjusted revenues up just 1.3% to £2.6bn.
Free cash flow was negative at £154.9m. Net debt was £545.5m, so the Capita One sale wonât clear all of that. It will still be large for a company with a market cap of £341m. No wonder the board is desperate to cut costs, targeting £60m of annual savings.
The outlook isnât that exciting, as the board expects 2024 revenue to be broadly in line with 2023, with only a âmodest improvement in operating marginâ. The company has made a pre-tax loss in three of the last five years. Revenues have fallen too, as my tab;e shows.
Revenues
£3.678bn
£3.325bn
£3.183bn
£3.015bn
£2.815bn
Pre-tax profit
-£62.6,m
-£49.4m
£285.6m
£61.4m
-£106.6m
Another danger is that after the recent spike, investors could take their profits (or cut their losses). I suspect investors have had their fun for now. I can think of a heap of growth stocks I’d rather buy first.
The post Up 47% in a week! Can the Capita share price continue to rocket? appeared first on The Motley Fool UK.
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Capita’s share price soars 20% on asset sale! Time to buy?
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
