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Capita share price decline presents buying opportunity, says RBC

RBC repeated an ‘outperform’ rating on Capita and raised its target price to 210p from 200p
RBC thinks Capita's turnaround plan is on track

Capita PLC (LON:CPI) shares have fallen 21% since the outsourcer cut its full-year profit guidance but RBC Capital Markets sees this as a buying opportunity.

RBC repeated an ‘outperform’ rating on Capita and raised its target price to 210p from 200p, saying it thinks the drop in the share price is a surprise.

Earlier this month, Capita said it expects full-year underlying profits to be between £250mln-£275mln, compared to the £270mln-£300mln it estimated earlier this year, after first-half profits fell 59% to £80.5mln and organic revenue dropped 2.4%.

READ: Capita lowers profit guidance and warns turnaround plan will take time

However, chief executive Jonathan Lewis said he was making good progress on his turnaround strategy and repeated his guidance for a return to growth in 2020.

“With near-term guidance reiterated, 2020 targets unaltered and financial deleveraging ahead of plan, we are reassured,” RBC said.

“This story is about cost savings and self-help (not organic growth) at present and on this basis, the group is on track.”

'Capita still thinking about new growth opportunities'

RBC said while the focus remains on Capita’s restructuring, it is encouraging to see developments like the company’s partnership with Microsoft to create a workspace application. The broker said this indicates that management is still thinking about new growth opportunities.

“This turnaround (for at least the next 18 months) is about what management can influence and not what the market does,” it added.

RBC expects a re-rating, to be driven by the delivery of cost savings, contract rehabilitation and cutting the interest cost, rather than organic growth.

Organic growth will remain difficult, RBC said, as it struggles with contract attrition and a benign UK market.

'Market caution looks overdone'

However, the broker thinks the turnaround looks “very within its compass and on this basis, market caution looks overdone to us”.

“We are not arguing that Capita has a superior business model. Indeed, with £500mln of investment needed over the next three years, there is evidently much to do,” RBC said.

“Concerns on its ability to win work and retain work will also persist. However, recent wins imply the group is not out in the 'wilderness' in the UK and we continue to believe that cost savings have been conservatively guided.”

RBC upgraded its earnings per share estimate for fiscal year 2018 by 4.5% to 11.60p. For 2019, it raised its EPS forecast by 8.5% to 13.60p. 

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