Broker snap: Capita still a long term winner

18th Nov 2010 12:46

KBC Peel Hunt expects to revise down its full year revenue forecast for outsourcing company Capita but is still high on the medium and long term prospects of the company."Overall trading remains solid despite subdued revenue growth, and margins are progressing, thanks to internal efficiencies and increased benefits of scale", said analyst Henry Carver, after the company's trading statement on Thursday.The company has downplayed the impact of the cost-cutting deal it has agreed with the government, saying the impact will not be material to the group, and this has removed a large 'unknown' created by the comprehensive spending review, the broker argues.Peel Hunt concludes that the short term remains tough, but the longer term opportunities "in both public and private sectors" are more apparent than ever."Our initial read of the statement is that 2010 full year estimated revenues will be lower than expected, but profits in line; however, until we can gain further clarification we are placing our forecasts under review."Nevertheless, the broker is maintaining its positive stance as any doubts surrounding margin pressure and the negative impact of the spending review should now be allayed."With a strong financial position underpinning future growth and an outstanding management team, we continue to regard it as a key pick in the sector," says Carver, reiterating a 'buy' rating and target price of 850p.Panmure Gordon is also a buyer of the stock, though it expects revenue growth to remain subdued. Much of this will be mitigated, however, by margin expansion, as the company continues to offshore more processed to India. "Our longer term stance on the shares remain unchanged, as we believe 'pent up' demand will emerge in the public sector next year, with Capita still very well placed to benefit from this in our view," the broker said."We are very much of the view that organic growth will revert back to more normal levels, and the headwinds seen during 2010 should turn into positive tailwinds for 2011 and beyond," Panmure Gordon predicted.The broker has an 885p price target based on a ratio of 18 times projected 2011 earnings. The shares took a hammering in the wake of the announcement of the interim management statement and Panmure Gordon thinks such instances of share price weakness represent suitable opportunities to increase exposure to the stock, particularly for investors "with longer term horizons".