If Paul Pindar, chief executive of Capita, shares any of the concerns that some in the City have about the prospects for Britain’s biggest outsourcing group, he does a good job of hiding it.
A trading statement last month sparked worries that, with government spending under pressure and the private sector struggling, the group’s sales growth was slowing. The shares fell 5 per cent.
But Mr Pindar dismisses suggestions that the days of double-digit organic growth are over, speaking of the “vast” areas of government that Capita has still to tap.
“I don’t want to use the word ‘relaxed’ because I think that sounds complacent, but we’re in a place that we’ve been before,” Mr Pindar says, referring to the early 1990s.
“The top line growth slowed off for a couple of years and then, when we came out of recession, it took off again.”
Investors have grown accustomed to strong returns. Capita has taken over a swathe of public services and about half of its turnover comes from the public sector.
Revenue has grown at a compound annual rate of 26 per cent for the past 10 years, according to KBC Peel Hunt. The shares have reacted well, more than doubling in value over the past 10 years.
Few of the recent naysayers – only five of the 19 analysts who cover the stock recommend buying – dispute that the company has performed well. Rather, their concern is valuation: the stock is one of the most expensive in the support services sector, trading at 19 times forecast earnings.
That gives little room for any slip-ups, and some analysts fear that the cracks are beginning to show. Last month’s trading statement said that Capita has secured £1bn of new business this year, but £814m of that was in the first half, so the win rate has been slowing.
Mr Pindar suggests some observers have taken a misguidedly short-term view and focus too much on the top line.
“If you look at the underlying strength in the business at the moment, the margin growth is still looking encouraging, as is profit. The environment for acquisitions is extremely healthy.
“The one area that we would like to see a little bit more head of steam is just around the underlying organic growth. There’s no doubt the market for that is tougher than it was 12 months ago.”
Nomura estimates that there has been a “revenue drop-off” of about £80m this year. IBM, for example, recently won from Capita the right to administer London’s congestion charge.
With such a large proportion of the group’s work coming from the public sector, analysts will be keeping an eye on Wednesday’s pre-Budget report. But the direction of the next government is of greater concern. Mr Pindar says that the government is reluctant to farm out big projects before May and that civil servants are in hiatus mode.
Like most of his sector peers, Mr Pindar is careful not to express any preference for either of the two main political parties, arguing that the pressure on public finances is such that there will be considerably more outsourcing whoever wins the general election.
However, that is as long as there is a clear victor. The prospect of a hung parliament– with its accompanying political wrangling – is one of his biggest concerns. Another is the attitude of some in Whitehall. In this respect, he agrees with Francis Maude, the shadow Cabinet Office minister, who said that the government was guilty of “complacency” in planned IT savings.
A document leaked ahead of Wednesday’s pre-Budget report set out proposals to save £3.2bn on government spending on IT over the next 10 years.
“If those are the sorts of numbers that are being targeted, that shows a remarkable lack of ambition,” says Mr Pindar. “There is much more to play for in a shorter timescale.”
Crucially, Mr Pindar says that Capita is unlikely to resort to lower pricing.
The next government will not simply hand contracts to the lowest bidder, he says, and points to incapacity benefits as an example.
“It’s costing the country £12bn a year. The last five or 10 million that you pay a supplier is nothing in comparison with the impact that you could have if you run the system in the most efficient way.”
He expects the current “quiet period” will not last much longer since the next government will be more keen than ever on Capita’s services.
“The time for writing reports is finished. The time for implementation is pretty close upon us.”
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