Capita share price: what to expect from 2018 results

When is Capita’s earnings date?

Capita is expected to report its earnings on 14 March, covering the year to 31 December 2018.

Capita’s results preview: what does the City expect?

Capita is expected to report earnings of 13.2p per share, down 52.5% over the year, while revenue is forecast to fall 5% to £3.9 billion. It has beaten estimates for earnings in five of the last eight updates, and beaten revenue in four of the last eight.

The great days of outsourcing appear to be long gone, but Capita is still an interesting company for investors, despite the more difficult outlook. Outsourcing is no longer the craze it once was though, and investors must look more closely at the firm and its potential. The firm has been ejected from the FTSE 100 as a result of the decline in its share price, and a glance at the headlines involving the company over the past year shows.

The year 2018 witnessed the collapse of Carillion and renewed government and investor focus on the firms in the outsourcing sector. Capita itself warned on profits in January 2018, just after the Carillion collapse, and then revealed in August that profits for the first half had fallen 60%. The end of the year was no better, as the firm was criticized for a blunder over cancer letters.

Changes in the firm’s management, a £700 million rights issue and a slow disposal of non-core assets will help to bolster the firm, while success in winning new business also provides hope that some of the worst is now behind it.

At 8.6 times forward earnings the shares are well below the five-year average of 12.6, suggesting that much of the bad news is arguably ‘in the price’, or at least that expectations are sufficiently low to provide a margin of safety in the near term.

How to trade Capita’s annual results

On average, the share price moves 6.2% on results day, but at present implied options pricing indicates that the shares will move 13.5%. Options pricing does not suggest which way the price will move, merely that it is expected to move by that percentage.

Broker ratings are fairly neutral at present, given that, of 16 brokers, eight have ‘buy’ ratings, but seven have ‘neutral’ ones, with one ‘sell’.

How has the Capita share price been performing?

Having traded at over £6.00 back in late 2017, the decline in Capita’s share price has been dramatic, and so far shows little sign of stopping. The decline had begun relatively steadily from summer 2017, but then gathered pace so that by the beginning of 2018 the shares were down almost 50%.

But this was just the prelude. In January the profit warning wiped almost another 50% from the share price, and, despite a rebound in April, which was followed by another gap down, taking another 70p off the price. A degree of sideways movement followed but new lows were seen in November and December, confirming the bearish trend.

Capita share price: technical analysis

A descending triangle formation remains in play here, as the price posts lower highs while holding above 100p after several tests of this level.

This formation is, however, a bearish one, and suggests that it could see 100p broken in due course as bearish momentum gathers pace.

It is certainly the case that the price has yet to make any kind of real push higher; the 26% rally from the December lows to the March high at 128p was impressive, but failed to alter the view that the sellers are still in control. Indeed, price action over the past few months resembles two boxes, with a tight range from November to the end of December, and then more sideways movement in the first two months of 2019.

Capita’s shares are still only a short distance away from all-time lows, around 100p, and unless the full year numbers provide a positive catalyst, new record lows seem likely.

Conclusion

Outsourcing is an industry in the midst of an upheaval, and Capita is not immune from this. Indeed, as perhaps the poster-boy of the sector it will have a hard time escaping its chequered past.

The turnaround is a long-term effort, and will take months before it starts to bear fruit, but it is a sign that the firm recognises the depth of the challenge. The shares trade at an undemanding valuation relative to the past few years, but arguably this is justified given the uncertain future for the sector.