Capita shares sink after RBC downgrades over cash flow concerns
Shares in outsourcing giant Capita fell more than eight per cent on Wednesday morning after RBC Capital Markets cut its rating on the stock to ‘sector perform’ from ‘outperform’.
The broker said that “a lack of visibility over cash flow generation” and “severe devaluation” of Capita’s peers, due to the advent of artificial intelligence, meant its “valuation no longer points to enough upside to be positive”.
RBC slashed its target share price by nearly half, from 42p to 23p.
“Whilst there remains material potential upside, if [Capita] can improve margins and [free cash flow] conversion, with the new CEO joining shortly, there is likely to be a lack of catalysts for c.6m until he has got his head under the bonnet,” RBC said in a note published today.
Adolfo Hernandez is due to replace Jon Lewis as the company’s chief executive next Wednesday.
As a result, RBC said there will likely be “no new messaging until the middle of the year regarding strategy or targets” and that the firm’s full-year results in March will be “somewhat of a non-event”.
RBC said it will be key for Hernandez provide confidence in the margin guidance and free cash flow generation and “communicate a genuine growth story”.
The note comes as Capita has sold off numerous non-core businesses over the last few years as it works to reduce its massive debt pile. It has been gradually stripping back its operations to two core businesses – Capita Public Service and Capita Experience, which provides customer support services to firms.
The firm has also looked to slash costs, announcing 900 job cuts in November.
Capita’s shares have slumped some 24 per cent in the last year.