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Should I buy Capita shares? 5 Reasons to avoid

There have been multiple warnings about trying to ‘catch the falling knife’ when it comes to Capita and it appears that this is for good reason following today’s full year 2020 results.

Once a darling of the FTSE 100, the struggling outsourcing firm has found itself in an irreversible decline over the past few years falling to a m.cap of around £500m not so long ago.

Yes Capita shares on the surface looked cheap compared to the peers it was keen to distance itself from (Serco and G4S), but its sizeable debt levels, unsuccessful turnaround and ultimately lack of top line growth were a big reason for that.

While the outsourcer has pointed towards COVID-19 for its more recent struggles, its rivals G4S and Serco have clearly been boosted it.

Today’s full year results only echoed Capita’s problems. Here’s 5 reasons we say to avoid and pursue other outright growth opportunities as the economy recovers:

  1. The turnaround has failed. Over the past 3 years, the Capita share price has fallen over 80%. One must remember that this is following a large rights issue previously and a string of disposals.
  2. Another change in direction. Today it unveiled another change in strategy with the announcement of two core divisions. Capita Public Service appears to be an attempt to go back its original roots (which it was looking to escape from), whereas Capita Experience appears to be a fairly broad segmentation. It seems likely that operationally, it will still be an assortment of existing business but now with a different badge.
  3. £1bn of debt and its top-line is retreating and will continue to do so.
  4. Disposals keep coming but at what price? It will help pay down the debt, but it will have a glaring hole in its books from the exit of some of its most profitable businesses that it seems unlikely to fill.
  5. It will end up a far smaller business. The continued sale of some of its most promising assets are proving to be a ‘get out of jail’ card and will ultimately lead to a far a smaller business, focusing on traditional low-margin areas.

Our View: Avoid and Seek Alternative Value Plays

Investors are currently having to find the positives in the negatives for Capita and this is where the problem lies. Across chatter boards this morning, the view was ”’its not going bust’ which says it all for this firm..

A m. cap of £800m amid a lack of growth catalysts, continued sale of highly profitable assets and a history of this being unsuccessful due to a troubled ‘core’ suggests that there are better value plays out there.

At this valuation, there is still a long way to fall and only so much further upside to be had.

For those investors that are still tempted, we’d suggest waiting to see demonstrable evidence of moving in the right direction before committing.

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