Capita PLC (LON:CPI) saw its shares gain around 3% in mid-morning trading following news after-hours on Friday of the £888mln disposal of the outsourcer’s asset services business, a price analysts at UBS called “better than expectations.”
In a note to clients, the Swiss bank’s analysts said: "This disposal had been well-flagged but the sale price is better than expectations (UBSe c£700m, c11x EBITA).”
READ: HSBC provides pointers for any new Capita CEO as they upgrade their rating for the outsourcer to 'buy'
Capita had revealed in December that it was seeking a buyer for its asset services division, which commentators had said could fetch up to £600mln.
The UBS analysts added: “We therefore see two positives: i) this disposal is a key step in Capita's turnaround plan, significantly de-gearing the balance sheet, reducing investor concern and giving scope for reinvestment; we estimate Capita may now finish FY17 at c1.6x ND/EBITDA vs. target 2.0-2.5x; ii) net of transaction costs, the excess proceeds of c£110m represent a c2% accretion to Capita's equity.”
In its brief statement on Friday, Capita said that, upon completion of the sale - expected in the fourth quarter - after the deduction of transaction expenses of approximately £72mln, the net cash proceeds are intended to be used to reduce indebtedness.
Disposal makes Capita a leaner business with a stronger balance sheet
Andy Parker, Capita’s chief executive – who in March announced his intention to step-down this autumn – said: “We have achieved an attractive price and the reduction in leverage is significant and ensures that Capita can fully focus on the pursuit of what it does best: continuing to deliver outstanding services to our clients and their customers.”
He added: “ The disposal of CAS, alongside our other initiatives, makes Capita a leaner business with a stronger balance sheet, better placed to return to profitable, sustainable growth.”
At the end of May, market rumours had also suggested that the under-pressure outsourcing group was in advanced talks about the sale of its recruitment division.
Sky News reported that the FTSE 250-listed firm was in exclusive negotiations to sell the division – which handles recruitment activity in areas such as social care, IT, education and energy – to specialist turnaround investor, Endless.
However, no confirmation on the discussions has come from Capita, which issued a fairly reassuring update on June 13 saying overall trading in the year to date is in line with expectations, and that it has also drawn up a shortlist of “strong candidates” to replace Parker.
READ: Capita says overall trading in line with expectations
UBS’s analysts noted that in a previous note on June 17 following Capita’s trading update they had “identified the steps that we believe Capita needs to go through to reform in the eyes of investors: de-gear the balance sheet, deliver cost savings targets, announce a new CEO, re-base accounting, and re-invest in technology to drive growth for the mid-term.”
They said: “This disposal is clearly a positive step, but there remains much more to be done. We also note that the positive share price performance recently, and particularly since the solid trading update, suggests some of this momentum may already be being priced in.
UBS reiterated a ‘neutral’ stance and price target of 580p on Capita shares.
In mid-morning trading, Capita shares on the FTSE 250 index were 2.8%, or 19.5p higher at 711.0p.