Monday, 8 October 2012

Capita (CPI) … adding to short

Capita announced last week that it had failed to renew the Criminal Records Bureau (CRB) contract it operated since 2002. This contract was widely reported to be worth £40m pa to Capita, or c. 1.1% next year’s sales. It’s not the end of the world but neither is it helpful and highlights the increasing competitiveness in the sector; a few years ago a renewal would likely have been a shoe-in for Capita. In the event, it appears that India’s Tata Consultancy Services is the winner.

As this had cropped back up on the radar and looking back as to why I began shorting (Capita ... it's very bouncy), I decided to short some more at 764p. The key reason to short remains that I reckon Capita will continue to face headwinds on cash flow. Capita had made a fairly large cash call at the start of the year, both through debt and equity. This was suggested to be used to make acquisitions. The size of the raise (c. £562m total; a £285m 2 year loan in February 2012 and c. £277m in equity in April 2012) pointed towards some urgency on the acquisition front. However, on inspection, spending appears to have been fairly pedestrian. The group appears to have spent £150-165m on acquisitions year to date, which is pretty similar to prior years and considerably less than the cash call.

Capita share price
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