The contractor is undergoing a major restructuring after issuing a profit warning and announcing a £700mln rights issue in January.
ShoreCap raised its rating on the stock to ‘hold’ from ‘sell’ with a target price of 152p.
“To be clear, we are fully behind CEO Mr Lewis’s strategy of restructuring the group, simplifying operations and refocusing upon a core of technology-based service solutions,” said ShoreCap analyst Robin Speakman.
“We simply fear that the group’s complexity and past growth by acquisition strategy hides a myriad of issues that may cost more and take longer to resolve than can yet be judged with any great visibility. It could be a better outcome than we fear of course – repeat: we have no visibility.”
The restructuring includes selling off non-core divisions, including its car park management business ParkingEye and contractor registry Constructionline, with proceeds to be used to pay down debt and reinvest its core operations.
Rights issue to be dilutive to shareholders
Speakman said the financial restructuring and rights issue will be “significantly dilutive” to shareholders in order to attract new investors.
Another worry is a significant overhang from ‘unsold rights’ from investors unwilling to subscribe, he said.
The analyst noted media reports that bondholders of about £1.5bn in debt have drafted in advisers to protect their interests during talks over the forthcoming overhaul.
Speakman assumes bondholders are looking for a ring-fencing arrangement, potentially pressuring management further on the size of the rights issue. He expects the fund raise to go ahead regardless.
Capita has potentially bright future, says ShoreCap
“As a strategic supplier to UK government and, indeed, to private sector clients we do believe that the company does have a future, and once rebuilt with focus and integrity, potentially a bright one,” he added.
“Assessing and pricing such potential at present (ahead of the refinancing) looks impossible to us at present, but we accept that long-term value may emerge over the next few years with volatility likely in the short term to our eyes.
“We also feel that investors still holding the shares are likely taking such a long-term view, those with a mind to sell have probably done so by now.”
Capita’s shares have more than halved since its January profit warning. In Wednesday morning trade, shares edged up 2% to 155p.