Capita (LON: CPI) shares are down 15% on the first half results. It’s possible to read the CPI results in one of two wildly different ways. One is to look at the current business numbers, the future contracts booked, and see that it’s a large and well functioning outsourcing business. The other is to look at recent performance and note that it’s had to - expensively - dump certain old businesses and contracts. The blend of these two then leads to the question - well, how many of those new contracts will end up like the old ones? How much of the new contract stream will end up producing those capital losses?
The actual announcement from Capita: “Adjusted revenue1 increased by 6% to £1,402.4m (H1 2022: £1,326.0m) with growth in underlying trading and one-off benefits in Experience from Virgin Media O2 contract transition and a commercial settlement
- Adjusted profit before tax1 increased by £8.4m to £33.1m (H1 2022: £24.7m)
- Reported loss before tax of £67.9m (H1 2022 profit: £0.1m) due to business exits, non-core Portfolio goodwill impairment and costs associated with the Group's cyber incident
- Free cash outflow excluding business exits2* of £53.4m (H1 2022 outflow: £16.5m) reflecting increased working capital, the cyber incident and increased digital investment
- Post-IFRS 16 net debt reduced by £165.8m to £544.6m (30 June 2022: £710.4m) driven by Portfolio disposal programme and continued rationalisation of leased property estate”
That neatly encapsulates the problem we’ve got here in making a valuation. Should we look at the ongoing business? Or the costs of the exited ones? And how much should we include in our valuation of the ongoing as a probability for some of them having to be exited at some point in the future?
Capita share price from Google Finance
There’s also that cyberattack issue: “Capita expects to take a financial hit of as much as £25m as a result of a cyber-attack that began in March, pushing the outsourcing group to a pre-tax loss of almost £68m for the first half of the year. The group is still recovering from the attack by the Black Basta ransomware group, which hacked its Microsoft Office 365 software and accessed the personal data of staff working for the company and dozens of clients.”
It is possible to legitimately think that that’s a one off cost and issue. But the rest of the business? Well, views vary as they say.
