Thursday, 23 July 2009

Growth slows at Capita

(By Anthony Miller – Thursday 23rd July 2009 8:00am). Even the mighty Capita is not totally inured from the effects of the downturn. Though most other companies would bite their right arm off for 8% organic growth (11% reported) in current market conditions (see here), Capita usually does better. This time last year, in 1H08, Capita grew the top line by 20%, and at year-end, by 18% (12% organic). CEO Paul Pindar assessed that under 10% of Capita’s revenues (FY08: £2.44b) are exposed to the downturn but this was 'factored into its business plans'.

At first blush, other indicators look OK but not exciting (though Capita is surely the poster-child for ‘boring’ in the best possible sense). Operating margins eased 10bps to 11.4% but rose 30bps to 12.2% when ‘adjusted’. The bid pipeline was still pretty full, £3.0b compared to £3.1b at year-end. I also noticed that Capita’s offshore ramp appeared to be slowing. In February, at the FY results, Pindar was aiming to have 3,600 FTEs in India by the end of May ’09. Now he talks about having 3,700 by the end of the year.

Anyway, the concall starts soon and I will bring you more later.

10:30 am Post-briefing update

You can always rely on Paul Pindar to come up with just the most wonderfully frank and honest quotable quotes. At the briefing just ended, he was asked about the extra care Capita takes when deciding which contracts to bid for: “Just look at the NHS Spine and the ID Card project which are a complete nightmare ... we kept out of it”. How prescient. On the other hand, he almost went as far as showering praise on local government, which he described as “not badly run” – a real compliment coming from him. As for the health sector, “we can quickly find 30% savings in the back office”. Actually, I have little doubt they can. In fact Capita’s focus on back-office BPO is what makes it so incredibly ‘boring’. While the likes of CSC and BT struggle mightily trying to get the ‘pointy end’ of the NHS working better, all Capita wants to do is get its teeth into the paperwork mountain at the back end.

But let’s cover a couple of points I raised above.

Growth. Yes, underlying growth has indeed slowed – it’s now around 1%. However, revenues from recent ‘big-ticket’ wins and extensions, such as at Axa Sun Life (see Capita scores L&P megadeal at Axa) and the Learning & Skills Council (see Learner Support contract comes home to Capita) added a further 7% organic growth. In fact Capita secured deals with £814m aggregate TCV in 1H09, vs £626m in 1H08. Acquisition value was also down in 1H09 though the number of deals was up – nine deals totalling £93m compared to 8 at £129m in 1H08. But this is exactly the point of Capita’s three-pronged growth strategy. When all engines are firing, Capita gets about a third of its growth from each of underlying contracts, big-ticket wins, and M&A. When times turn tough (as they did in 1990/91), Capita runs the big-ticket business and M&A harder. The model works. By the way, Capita has no major deals up for renewal before 2012 – how’s that for visibility?

India. Well, Pindar can sometimes be too glib. In February, he set an expectation that Capita would reach 4,500 FTEs in India by the end of this year; they had 3,200 at the time. “It was my fault – I got it wrong – it was meant to be 4,000”. As I said above, the new target is 3,700. This will still put 10% of Capita’s workforce offshore, but I feel that Capita has taken its foot off this particular accelerator and I really do want to find out why. Customers may well have their pricing locked into the contract (as Pindar reminded us today). But even though Capita seems to be getting little customer push-back, I would have thought it would make sense to get ahead of the curve, so to speak, and move more work offshore, anticipating clients will not always remain so quiescent.

Notwithstanding all of the above, it’s really hard to be critical of a machine that just keeps delivering the goods. Capita remains the best performing stock over the long haul in the UK software and IT services world (in which we include BPO) and at current course and speed shows no absolutely signs of losing its ‘Boring Award’ this year (see Capita on track to retain Boring Award). By the way in the interests of ‘glasnost’ I must tell you – and sorry I didn’t before – that I have had a very small shareholding in Capita since the late 90’s. Never bought or sold since – so unfortunately it’s never going to be a life-changing investment no matter how long I keep it!

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