The timing could scarcely have been less opportune. In April last year Capita told investors about its plan to raise just over £700 million through a rights issue — less than four months after the collapse of Carillion, its industry peer, and with the markets fretting about which of the big outsourcing companies might be the next to fail. Since Capita was warning at the same time of sharply lower future profits and was suspending its dividend, its shares, all too predictably, fell sharply.
A little over a year later and a good deal has changed — save for the unpopularity of the sector and Capita’s share price, which is close to record lows.
The company was founded in 1984 as part of the Chartered Institute of Public Finance and Accountancy, a not-for-profit body. It became an independent business via a management buyout in 1987 and was listed on the stock market in 1991. A constituent of the FTSE 250, it employs more than 63,000 people, has a market value of nearly £1.7 billion and generates annual revenues of nearly £4 billion.
With a strong emphasis on technology, Capita acts as a contractor to both the public and private sectors and generates nearly half its revenues from the government. As well as high-profile contracts to administer the TV licence fee and London’s congestion charge, it also manages customer services for O2, the telecoms group, and product returns for Marks & Spencer. And therein, perhaps, lies the rub: the group’s biggest problem has been its complexity, along with several problematic and collectively loss-making contracts, including running the recruitment process for the army and managing patient records for the NHS.
The task of Jonathan Lewis, 57, chief executive since the beginning of last year, has been to simplify the business and to make its various component parts talk properly to each other. He has completed the first year of a three-year turnaround plan, but has achieved a good deal already. As well as the rights issue, a large portion of which will be used to fund a £500 million investment in IT and infrastructure, he has auctioned off businesses worth a further £400 million and has hit an initial £70 million cost savings target, subsequently lifted to £175 million by the end of this year. He has brought in a new management team and successfully rebuilt Capita’s relations with customers. He has cut losses on the problem contracts and agreed a £176 million deal to reduce the pension deficit, which, alongside a strengthened balance sheet, will be important in winning future government business.
Net debts have been more than halved, from more than £1.1 billion to £466.1 million as of the end of last year, and he has created a new division, specialist services, which houses 16 businesses that are non-core — a travel and entertainment management unit, for example — some of which are likely to be sold over time.
There is a way to go. Capita is still complex and cumbersome. It owns numerous properties that are surplus to requirements, has ten internal IT help desks when it needs only the one and uses forty-six separate stationary suppliers, which is going to come down to seven.
The shares, up 2¼p, or 2.4 per cent, to 102¼p yesterday, remain in the doldrums, in part because the sector is so out of favour and partly because investors are waiting for more evidence that Mr Lewis is delivering. With no dividend, there’s no yield, but the shares trade on a multiple of only 7.3 times Jefferies’ forecast earnings. For those minded to chase the risk, this looks like a speculative “buy”.
ADVICE Buy
WHY Differentiated by its focus on technology, progress in the recovery is not shown in the price
888 Holdings
Two things stood out when 888 Holdings delivered its trading update and presentation to the City this month and probably explained the bounce in the gaming group’s share price on the day.
First, it was UK revenues, not only the sharp underlying rise — of 18 per cent between January and mid-May — but also the prevalence of exactly the kind of lower-risk customer that the company has been chasing.
Second was the potential created by buying Betbright, with technology that can transform its sports betting, from setting odds to making markets, including being tailored to punters in different countries. 888 Holdings is an online-only gaming group, based in Gibraltar, founded in 1997 and listed in London in 2005. Its customers play casino, sports, poker and bingo games and it also has a small division, Dragonfish, that sells services to companies aiming to commercialise gaming ventures.
After heightened regulatory scrutiny by the Gambling Commission, 888 Holdings spent most of last year shedding its more traditional high-rolling punters in Britain and taking on lower-risk “recreational” customers instead. This led to a 16 per cent slide in UK revenues to $170.6 million over the 12 months to the end of December, although there were improvements during the second half. In June, when it detailed the like-for-like rise, 888 Holdings also said that the “vast majority” had come from its new safer customer type, favoured by the commission.
Buying Betbright for £15 million in March meant that it gained full control over all its gaming products, whereas previously it had used a third party to quote odds and the like. This means that it will be able to upgrade its sports offering in the same way that it has overhauled its Orbit casino platform, where custom rose by 20 per cent year-on-year between January and mid-May.
When this column recommended holding the shares in late December, they stood at 175p. They have since fallen by nearly 11 per cent, but closed up 2p, or 1.3 per cent, at 156p yesterday, trading at 12.3 times forecast earnings for a yield of 6.7 per cent. Hold firm, they should come back.
ADVICE Hold
WHY Acquisition and customer overhaul primes it for solid growth
