Capita PLC (LSE:CPI) received a boost after Shore Capital Markets initiated coverage of the UK outsourcing group with a Buy rating, arguing that the company’s turnaround plan could support a return to positive free cash flow and higher margins.
The broker set a fair value estimate of £5.30 a share, above the current price of 389p, and said the market was not yet pricing in the group’s full recovery potential.
Shore Capital said Capita’s strategy to return to growth and “ultimately positive cash flows” offered upside from what it described as a normalisation of the group’s profile after years of restructuring.
The analysts said the business was starting from low margins, which created operating leverage as fixed cash costs were absorbed, while a wide range of outcomes reflected both the risks and the opportunity.
Shore Capital said it expected Capita to transition to positive adjusted free cash flow from this year and to strengthen margins over the medium term as it converted its opportunity pipeline into firm orders.
The broker highlighted the Contact Centre division as central to the investment case, saying its recovery would be critical to delivering the group’s target of rebuilding adjusted operating margins to 6–8% from 4% in 2024.
If Capita succeeds in its plan, Shore Capital said adjusted operating profit could ultimately recover to £163m from £96m in 2024, with free cash flow returning to inflows after prolonged outflows.
The shares were flat at 375p.