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Last updated: January 28, 2013 8:54 pm
The FTSE 100 remained on track for its best start of the year in more than two decades on Monday, but Capita was left behind.
A downgrade to “sell” from Canaccord Genuity sent the outsourcer sliding 0.9 per cent to 787p on more than twice the average daily volume.
Capita’s returns on invested capital have been deteriorating since 2007 and regular acquisitions appear not to have helped, suggesting a slower-growth business that deserves a lower valuation, the broker said.
Recent contract success means Capita shares have already priced in organic sales growth exceeding consensus estimates of 6 to 7 per cent this year, Canaccord argued. But recent government initiatives such as promoting open-source computing and shared ownership of services look likely to limit medium-term growth rates, it said.
That makes Capita even more reliant on acquisitions to drive earnings growth, Canaccord argued. But the purchase of general insurance and property divisions in recent years have disappointed and may need goodwill impairments, it said.
A reduction in the growth rates used to test acquired goodwill in Capita’s 2011 annual report “suggests to us that management also recognises that Capita’s best days for growth are behind it”, said Canaccord, which put a 650p price target on the stock.
Financial stocks helped FTSE 100 to another four-year high, up 9.96 points or 0.2 per cent to 6,294.41. The index has risen 6.7 per cent so far in January, its best start to a year since 1989.
Barclays led the FTSE risers, up 1.7 per cent to 305.9p. Goldman Sachs advised buying Barclays ahead of a strategy review next month, partly as a hedge against rising regulatory risk for its UK peers.
Royal Bank of Scotland , up 0.5 per cent to 367.8p, would be the most exposed to near-term regulatory risk, said Goldman as it downgraded to “sell”.
Barclays could also be impacted but was likely to announce balance sheet shrinkage as part of its strategic review, supporting capital ratios, said Goldman.
Reckitt Benckiser rose 1 per cent to £42.38. JPMorgan Cazenove forecast the Lemsip maker to beat sales growth guidance with its 2012 results next month, thanks to an active cold and flu season and continued lack of generic challengers to Suboxone, its heroin substitute.
Ahead of results due Friday, Tate & Lyle lost 1.2 per cent to 824p after Investec Securities cut the stock off its “buy” list.
Investec was cautious on the latest sweetener pricing round in the US, which it estimated determines about 15 per cent of Tate’s profits. The broker also argued that, with Tate shares up 29 per cent since mid-September, investors may be focusing on the group’s expansion of its speciality food ingredients business and ignoring signs of difficult trading in Mexico and Europe.
New World Resources fell 2.6 per cent to 304.9p after guiding that prices for thermal coal this year would be down 19 per cent. Merrill Lynch forecast that New World would have to mothball its Debiensko project in Poland. The broker cut its 2013 operating earnings forecast by 83 per cent and halved its price target to 80p.
Evraz slid 2.1 per cent to 293.7p on reports that it had agreed to buy full control of Kazankovskaya, a coal joint venture with the Russian steelmaker MMK. Analysts said the project would need extra funding to develop, which would increase Evraz’s high debt burden.
Home Retail Group dropped 7.2 per cent to 124p on a downgrade from Morgan Stanley.
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