Broker snap: Capita's valuation is 'too rich', says Panmure

13th Nov 2012 09:32

An 'in-line' trading statement from outsourcing giant Capita wasn't enough to change Panmure Gordon's 'sell' rating on the stock, which continues to believe that the stock's premium valuation over its peers is unjustified.Shares were down 1.17% at 718.5p in mid-morning trade on Tuesday, after an initial stint in the blue."A Q3 [interim management statement] from Capita confirms it is trading in line with expectations, with FY 2012E organic growth of +3% expected to be delivered. The pipeline of opportunities going into 2013E looks busy, albeit this will be primarily driven by the public sector in our view," the broker said.The bid pipeline currently stands at £4.0bn, 68% of which are in the public sector (mainly central government), "which is a key factor behind our concerns on future margins", Panmure said.The broker has maintained its forecasts and 620p target price for the shares on the back of these results. However, with 15% potential downside for the stock, the broker has been prompted to retain its 'sell' rating."Capita currently trades at a 4-9% [price-to-earnings ratio] premium to its outsourcing peers on 2012E and 2013E estimates [...] which we continue to believe is too rich. "The shares could go better this morning on confirmation that it will deliver on 2012E organic growth, but we remain concerned that its above average margins could prove difficult to sustain in the current environment," Panmure said.BC