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Capita shares rebound as Morgan Stanley moves to 'equal-weight' rating

Published: 09:55 02 Feb 2018 GMT

Capita
Capita issued a profit warning and announced a rights issue on Wednesday

Capita PLC (LON:CPI) shares received a much-needed boost on Friday after Morgan Stanley raised its rating on the struggling outsourcer to ‘equal-weight’ from ‘underweight’.

The contractor on Wednesday announced a £700mln rights issue and said it would scrap its dividend as it warned on profits, sending its shares tumbling.

READ: Capita shares plunge as it warns on profits and announces £700mln rights issue

Jonathan Lewis, who started as Capita’s chief executive two months ago, said the group plans to sell off divisions to pay down debts and reinvest in its core operations.

The group expects 2018 underlying pre-tax profits to be lower at around £270mln to £300mln, below consensus forecasts of £380mln, due to contract delays, higher attrition, weak new sales and higher costs.

Capita's guidance provides 'limited visibility'

Morgan Stanley said the outlook for Capita’s estimates remains unclear until a strategic update later in the year and cut its target price on the stock to 180p from 460p.

“We continue to view Capita as a traditional BPO (business process outsourcing) provider that is competitively challenged, which justifies a discount to its wider peers,” it said.

“But with the shares now up with events, we move to equal-weight.”

Morgan Stanley expects Capita to report underlying pre-tax profit of £275mln, which is 30% below its estimates prior to the company’s profit earnings.

Capita’s guidance provides limited visibility as it assumes flat revenue and does not include any additional cost efficiencies or investment with the company saying “2018 will be a year of net investment” and 2019 “could be”, Morgan Stanley said.

Capita 'needs to develop strategy for digital transformation'

The company is trading at a 25% discount to its peers, the financial services firm added.

“We continue to believe that, like most sector peers, Capita needs to develop a co-ordinated strategy for digital transformation/automation,” Morgan Stanley said.

“We suspect it is accelerating investment in this, but also expect the market place to be changing quickly.”

Shares rose 5% to 166.2p in morning trading. 

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