Half-year results at the start of the month saw the FTSE 250 outsourcer reiterate its 2019 guidance and 2020 targets with management expecting the software division to grow by mid- to high-single digits in 2020. JPMorgan said this was “key” given the positive mix and likely working capital benefit.
But the investment bank's analysts said achieving a double-digit 2020 group margin was a bit more difficult due to the drag from the Ministry of Defence’s fire and rescue project “and will depend on growth”.
The analysts forecast PBT of £278mln, around the middle of the £265mln-295mln guidance range, with a 5% organic decline in 2019 implying a 4% drop in the second half and flat in 2020.
“We suspect the bulls might be proven too positive,” they said, noting that there was quite a difference of opinion on Capita in the Square Mile, with five ‘buys’, two ‘sells’ and six ‘holds’, including JPM.
With the shares’ valuation “interesting” at around nine times 2020 earnings per share and with a 7% dividend yield, with further potential upside from disposals, JPM said it remained “constructive” but downgraded its recommendation based on a share price target derived from a discounted cash flow analysts.
Thus with the price target cut to 140p from 150p the investment bank moved its rating to ‘neutral’ from ‘overweight’.