US Edition Capita Group
741p +5½p
Questor says Buy
While some commentators insisted the sector was doomed after more than £80bn of Government cuts, others – including Questor – were in the bull camp when it came to prospects for outsourcing groups. After all, funding pressures in Whitehall and at local authorities meant that services were more likely to be put out to tender for third parties.
The CSR unveiled a 7.1pc cut in council budgets each year for four years with the administrative budgets of every main government department cut by a third.
Back in October, Questor placed a cautious hold on Capita arguing that investors should wait to see whether the company could capitalise on these budget cuts. Since then, Capita's shares have risen about 5pc and an upbeat trading statement on Tuesday proved that the company expects trading conditions to be strong during the second half of 2011.
Capita, which manages TV licensing for the BBC and provides criminal records service for the Home Office, is well known as a company that can handle outsourcing of back office functions. During the first four months of the year, the group said it had seen a busy sales period, particularly in outsourcing across the life and pensions and local government markets.
Elsewhere, Capita said it had signed 7 contracts, including extensions, so far in 2011 with an aggregate value of £313m. More importantly, the group said it had a record "bid pipeline" (potential new contracts) of £4.7bn, helped by the Government public service reforms.
Capita's shares are trading on a December 2011 price to earnings ratio of 15.3, falling to 12.6 in 2014, and its yield is 2.9pc. The group has also insisted there remains a good volume of potential acquisitions and it expects to buy more businesses this year.
With the pipeline of future of business so strong, Capita is a buy opportunity for new investors. While some outsourcers such as Connaught have floundered following the financial crisis, others have not.
Capita is firmly in the latter camp.