Outsourcing group Capita has fallen back on concerns it could miss out on a lucrative Army contract.
The company has already had a disappointing start to 2012, says Espirito Santo, missing out on a couple of prospects in Edinburgh and an Aviva contract in Ireland which was subsequently pulled.
Analyst David Brockton has moved from neutral to sell on Capita and cut his target price from 660p to 560p. He believes Capita's market position is likely to attract greater competition for contracts, with its geographical profile not diversified enough to make up for any shortfall.
As for the Army recruitment contract, said to be worth around £50m, he believes investors may be being too positive about Capita's chances of success (it is competing with a Serco/Logica consortium):
We believe Capita is widely considered by the market to be the favourite for this contract. However, our industry checks have suggested that this may not be the case: we suspect that the contract size has reduced to reflect a lower than initially envisaged IT content, removing the group's initial advantage. We also suspect Serco and Logica will have used their full pricing advantage, due to their lower current operating margins (6.0% and 5.7% respectively versus Capita 14.4%), pressuring Capita's prospects of securing the contract or the return it could generate if successful.
Capita's shares are currently 2.5p lower at 632p.
