Friday 20 April 2018

Capita turns a crisis into an opportunity

Dr John Lynch

If you want to get a trade unionist boiling mad, creep up and shout 'outsourcing' into his or her ear. Over the past decade it has been probably the single greatest source of job insecurity but also a heaven-sent opportunity for companies to focus on their core competencies and often mitigate skill shortages.

In other words, it is a concept that could have people arguing for a year without the slightest hope of agreement. But what cannot be denied is that it is a business that has become hugely profitable as the company we are looking at today, Capita, amply proves.

But the firm proves something else. It shows that there have been some beneficiaries of the Irish economic collapse and Capita – which is handling some former AIB businesses offloaded during the continuing crisis, as well as the activities of NAMA – is one of the gainers. It employs 1,200 people here while being still determinedly low key.

Capita got going in the UK in 1987 when it was backed by venture capitalist 3i. It was a listed company by 1991 and now boasts that it is the largest independent business process outsourcing company operating mainly in the UK.

It has more than 300 big contracts with the UK government and private sector, ranging from the BBC to Prudential Insurance. It has 40,000 employees in the UK, Europe, South Africa and India.

The principle of outsourcing is to generate cost savings, increase productivity and reduce the number of employees, so you can see why the unions think it is the work of Satan. Since the election of the Cameron government, the outlook for the outsourcing sector has improved considerably in Britain, in terms of sales and profits.

The privatisation model is being sold as an answer for hard-pressed local councils. Today, half of the UK waste industry is privatised and a quarter of all local councils' human resources, IT and payroll functions are also privatised.

Capita has been a major beneficiary of the 'new' government policy as can be seen by the number of contracts it has won. If such inroads were to occur in Ireland, I suspect we would need more than the Haddington Road Agreement to control tempers.

Consider the following contracts won by Capita in the UK. It has won the Civil Service Learning Agreement, a contract to exclusively manage training for the UK civil service. It also has a contract with the British Army, Royal Navy and Air Force for their recruitment requirements.

In addition, a more radical approach has recently been adopted by three major London councils in contracting for all three in the areas of catering, landscaping, reception and building maintenance.

Capita is indeed a formidable company running a private service within a public service. Now and again, some contracts cause problems, such as the one it handles for the UK Border Agency. The contract required the firm to trace 174,000 illegal migrants to begin the process of deportation. Incredibly the company fingered the wrong people.

Capita revenue is divided equally between the public and private sector. The major contributors are private insurance (22pc) and life and pensions (19pc). Its success in the private sector has been shown by being selected by 02 as the preferred bidder for its customer service, a contract worth £1.2bn (€1.4bn).

It has also been mopping up companies in recent years, spending a huge €820m on 47 different acquisitions but it sees the need now for more organic growth due to tightening margin concerns.

Capita has operated here for about a decade. In 2011, it acquired the international financial services business of AIB, which employed about 100 staff. However, its contract to service Anglo Irish Bank loans on behalf of NAMA makes it a very interesting firm right now.

Capita shares trade at £10.18, having a 52-week low of £7.53. Its price-to-earnings ratio is a high 25. Revenue for the year at £3.4bn is up 14pc, profits before tax at £425m also up 10pc. In the opinion of some, sales for this year could be £3.9bn and in 2014 £4.2bn.

Capita is valued at £6.5bn and should have organic growth of 8pc this year. These shares are defensive, usually good in recession. Of some concern for investors is that Capita is a conglomerate (out of favour) focused mainly on the UK (problem economy) but there is little doubt that there is an appetite for outsourcing and Capita is a major player.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares.

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