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Highlights
- Operating Profit Margin: Expected to improve by 50bps in 2024, supported by significant cost reductions.
- AI Integration: Capita plans to leverage AI and generative AI to enhance service delivery and savings.
- Free Cash Flow Outlook: Positive and sustainable free cash flow expected from late 2025.
Capita plc (LSE:CPI), a leading business services provider, has reported steady progress in its operational efficiency for 2024, with margins continuing to improve. The company attributes this growth to its focus on a streamlined operating model and cost-saving initiatives, which are expected to drive long-term profitability.
Stable Profit Outlook Amid Revenue Decline
Capita confirmed that its adjusted operating profit margin is on track to rise by approximately 50 basis points in 2024. This improvement comes despite an estimated 8% decline in adjusted revenue for the eleven months ending 30 November 2024. The decline was largely due to the company’s strategic exit from lower-margin service lines and lingering headwinds from the previous year.
The company’s focus on cost reductions has borne fruit, with annualized savings of £140 million already achieved out of its £160 million target. Capita’s leadership remains confident that these efforts will maintain steady profitability in the medium term.
AI-Driven Cost-Savings Potential Raised to £250 Million
One of Capita’s key strategies involves the integration of Artificial Intelligence (AI) and generative AI into its operations. By leveraging live project experience and advanced data capture capabilities, Capita sees significant opportunities to improve service offerings and drive efficiency. As a result, the company has raised its overall cost-saving target to £250 million by December 2025.
Capita’s CEO emphasized the role of AI in accelerating operational transformation, noting that smarter technology solutions will not only cut costs but also enhance client outcomes.
Addressing National Insurance Cost Increases
Capita anticipates an annual cost increase of approximately £20 million due to higher National Insurance Contributions for employers. However, the company is confident that its cost-saving measures will mitigate this additional burden over the medium term.
Cash Flow Challenges and Future Projections
For 2024, Capita expects a free cash outflow in the range of £120 million to £140 million. This outflow reflects lower revenues and the company’s commitment to a sustainable working capital approach. Additionally, up to £50 million in cash restructuring costs aimed at delivering further savings will impact free cash flow primarily in the first half of 2025.
Looking ahead, Capita expects to achieve positive and consistent free cash flow starting from the end of 2025.
Debt Reduction and Strategic Divestments
Capita has made notable progress in exiting businesses deemed “managed for value.” This includes the completion of the Capita One disposal in September 2024, which generated approximately £180 million in net proceeds. These funds provide the company with greater flexibility and optionality for strategic investments.
By the end of 2024, Capita anticipates its net financial debt to adjusted EBITDA ratio (pre-IFRS 16) will fall to less than 1.0x, underscoring its commitment to strengthening the balance sheet.
Confident Outlook for Long-Term Margins
The Board has reiterated its growing confidence in achieving Capita’s medium-term operating margin target of 6-8%. This goal reflects the company’s continued focus on operational efficiency, cost optimization, and strategic investments in technology
