Capita PLC (LON:CPI) continued to tumble on Friday as various brokers slashed their share price targets, but recommendations remained positive and broker Shore Capital doled out an upgrade on the potential for “deep value” to emerge in the shares.
ShoreCap’s analysts admitted that results from the day before reflected concerns about the impact of continuing revenue attrition, with the book-to-bill ratio running at 60% which is “pressuring profitability and thus cash generation”.
READ: Capita crumbles as transformation "requires more investment than expected"
As part of the government contractor and business process outsourcer’s results, chief executive Jon Lewis said that two years into his turnaround process the efforts to restructure was “requiring more investment than we had expected”.
With Capita facing materially lower market demand, competition from lower-cost platforms and rapid technology change, combined with high debt levels, the ShoreCap analysts said transformations from such “structurally impaired economic positions…will likely be challenging and need to considered over a longer timeframe than two or three years, with ongoing responses to further market and technology changes necessary”.
The analysts said they “sympathise with the valiant effort” made by Capita’s management team: “We do believe that progress is being made, the time frame is set to be longer than initially indicated no doubt”.
ShoreCap moved its recommendation to ‘hold’ from ‘sell’ as it sees “potential for deep value to emerge”, while still acknowledging that the company faces “structural, strategic and competition challenges”, which will not be fully answered through the course of the next year.
“Risk is high and hitherto we believe that the market has not priced this fully. Strategic value in Capita is real, however, and this deserves to be considered.”
Deutsche Bank, meanwhile, slashed its target price to 80p from 150p but kept its ‘hold’ rating, saying "we see it as justifiable that the share price has seen such a reaction".
The DB analysts said with "many incremental headwinds" in 2020, it "requires a substantial improvement in underlying performance in order to avoid leverage covenant issues".
Goldman Sachs, which added the shares to its 'conviction buy’ list in January, cut its price target to 200p from 240p; while Barclays cut its price target to 115p from 175p but again remained at ‘overweight’.
Capita's shares fell 18% to 63.74p on Friday morning, down by around two thirds since last summer and scraping lows not seen since 1996.