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Highlights:
- Capita PLC’s revenue dropped by 8% over 11 months, with a high-single-digit decline forecast for 2024.
- Cost savings have supported profits despite weaker revenues and increased cash outflow.
- Deutsche Bank revised Capita’s target price to 27p, down from 30p, but remains optimistic about recovery prospects.
Capita PLC (LSE:CPI) has seen its share price downgraded by Deutsche Bank following a trading update revealing weaker-than-expected revenues and cash flow. Despite the setback, analysts maintain a positive outlook on the company’s recovery potential, underpinned by cost-saving measures and a strategic focus on efficiency.
Weaker Revenues Impact Overall Performance
Revenues for the first 11 months of 2023 declined by 8%, with a high-single-digit contraction projected for 2024. The underperformance was largely driven by a 16.3% drop in Capita’s Experience division, including an 18.5% decline in the Contact Centres segment. The revenue shortfall stems from one-off impacts in the prior year and unexpectedly lower volumes on a key telecommunications contract.
Cost Savings Cushion Profitability
While revenues faltered, Capita’s profitability benefited from cost-saving initiatives. These measures have partially offset the impact of weaker performance, ensuring that profit guidance remains in line with previous forecasts. However, the company’s free cash outflow has risen to a projected £120 million to £140 million, exceeding prior guidance of £90 million to £110 million.
Deutsche Bank Revises Share Price Target
Deutsche Bank has lowered its price target for Capita’s shares to 27p, down from 30p, reflecting the challenging revenue environment and increased cash flow concerns. Despite this, the bank maintains a positive view on Capita’s long-term recovery, citing ongoing cost-saving strategies and potential for improved performance in 2024 and beyond.
Path to Recovery
Capita’s challenges highlight the importance of addressing revenue weaknesses while leveraging cost efficiency to sustain profitability. The company’s ability to stabilize its Experience division and recover volumes in critical contracts will be key to reversing the current downward trend.
As Capita navigates these hurdles, its strategic focus and commitment to cost savings provide a foundation for recovery. The revised outlook by Deutsche Bank underscores the cautious optimism surrounding the company’s ability to adapt and thrive in a competitive landscape.
