Outsourcing group Capita has slipped back after a downbeat note from analysts at Morgan Stanley.
The bank issued an underweight rating, albeit lifting its target price form 950p to 990p, on the basis that it expects weak organic growth to come. Analyst Allen Wells said:
Revenue growth should be in low-double digits but is incrementally driven by acquisitions, and low organic growth in the first half could disappoint. On 18.3 times 2016 estimated PE, share looks unattractive, with better opportunities in the sector: we prefer Babcock among outsourcers.
We struggle to justify Capita’s 45% premium to Babcock, given our view on lower growth, downside risk to margins and concerns on falling cash generation and returns.
We expect first half 2015 organic growth of 4.1%, implying a slowdown in 2015 versus 2014’s 9% and compares to management expectation of mid-single digit organic growth in 2015.
We expect acquisitions to drive 7% revenue growth, implying total revenue of £2,299m in the first half of 2015, implying 11% year on year (consensus 10%) and in line with management expectation of low double digit revenue growth in 2015
However, with revenue growth incrementally driven by the acquisitions we see further risk, as this remains dilutive to returns.
Accounting for recent acquisitions increases our 2015-2017 estimated earnings per share increases by 2%, offsetting the impact of 40 basis points lower organic growth in 2015. Our price target moves up to 990p from 950p driven by higher earnings per share and valuation capturing more of 2016 versus 2015.
In a falling market, Capita is down 4p at £13.16 and Babcock 2p lower at £11.09.
