Waiting on new deal

Published on Thursday 19 November 2009 21:18

Capita 716.5p -4.5p Scotsman says SELL

CAPITA is a business process outsourcing and professional services company. The firm delivers back office administration and front office customer contact services to private and public sector bodies in the UK and Ireland.

The company is involved in a number of high-profile contracts, such as handling the IT system for the Criminal Records Bureau and managing TV licensing for the BBC.

Capita has grown its turnover and earnings rapidly over the past five years, with a compound average growth rate of 18 per cent, and this success has been mirrored by its share price, which is currently nearing its all-time high.

The share price has recovered strongly since the company announced its interim results in July but, worryingly, the interims revealed organic growth was slowing sharply.

There was also recognition by management that the company needed a strong second half to the year to ensure double-digit revenue growth, but there's been little evidence of new contracts to date.

The stock market appears to be accepting there will be a multitude of public sector outsourcing opportunities after the general election, possibly in May 2010. That said, the benefits of any new work are likely to take 12 months to materialise and the last significant central government contract won by Capita was in 2004, a point that is seemingly being overlooked.

Capita trades on an estimated 2010 P/E of 19x and on this rating the company will need to produce upgrades. If these are not forthcoming, then the pressure on the share price is likely to be downwards.

&#149 Craig Yeaman is investment director at Saracen Fund Managers. The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.