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Questor: Capita’s new strategy looks sound, so stick with the shares and take up your rights
Capita has not been this column’s most successful stock, even though we rated it only as a hold when we looked at it in October 2016 at 669p. The shares closed last night at about 177.3p, representing a fall of more than 70pc. We will, however, resist the urge to cut our losses now.
Questor is normally wary of complex, difficult-to-understand businesses and Capita, at least in its current form, is far from simple. However, it promised on Monday to “simplify and strengthen the business in order to deliver future success”.
The group said its objective was now to “become a more focused and predictable, client-centric company, generating sustainable free cash flow”.
Given the difficulties that apparently profitable companies can get themselves into when they fail to convert accounting profits into actual cash, we also welcome Capita’s emphasis on this point.
To fund its transformation and to cut debt, the group said it would raise £701m from investors via a rights issue. Shareholders will be able to buy three new shares, at 70p apiece, for every two already held.
Questor feels that the shares are now past their worst and that existing investors won’t get another chance to buy them at 70p. The new money raised by the rights issue should also put paid to any lingering fears that Capita could follow Carillion, another outsourcer, into oblivion.
However, we expect the stock’s recovery to be slow as the market gradually regains faith in the company and its management. Investors may have reacted favourably to the new strategy – the share price rose by 13.1pc on Monday – but in future they are likely to look for evidence that it is actually working.
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Analysts at CFRA, the research group, said: “While we are generally positive on the turnaround plan, we are wary of execution risks. Any signal to resume its dividend would be a good indicator, in our view.”
Existing shareholders including Woodford Investment Management, on whose faith in the stock we based our original “hold” advice, have said they will subscribe for new shares in the rights issue. Capita directors who hold shares have pledged to do the same.
Questor says: hold, take up rights
Ticker: CPI
Share price at close: 177.3p
Update: Clarkson
One of our more successful tips has been Clarkson, the shipping brokerage. We said buy at £19.75 in November 2016 and the shares closed last night at £25.40.
However, they reached £34.50 last month before a profit warning on Monday sent them tumbling. The 166-year-old company said both interim and full-year profits would be “materially below” last year’s.
Montanaro Asset Management, whose holding in the stock prompted our tip, said it was surprised by the profit warning but would be holding on to its stake. Gaspar Arino, an analyst at Montanaro, said Clarkson ascribed the profits warning to the weakness of the dollar, in which much of its business is carried out, and to the recent turmoil in the financial markets, which had affected shipping transactions.
“The shipping markets are highly cyclical,” he said. “They have gone through challenging times for a few years and it is not possible to accurately call the bottom of the cycle.
“The weakness in [Monday’s] announcement comes from the less predictable side of the business, the financing and asset base transaction business. However, the chartering activity has been more stable and continues its recovery path.”
He added: “My view is that the long-term thesis has not changed and that Clarkson is well placed to capitalise on the recovery of the different shipping markets. Recoveries don’t happen in a straight line and management has been straightforward communicating with investors.
“The company is cash generative, has a strong balance sheet, will pay increasing dividends and trades at 19 times expected earnings for 2019. I think the shares will recover back to £30.”
The company paid a dividend of 66p a share for the year to December 2017, so the shares currently yield 2.6pc.
Questor says: hold
Ticker: CKN
Share price at close: £25.40