Broker snap: Citi downgrades Capita on valuation grounds

12th Aug 2013 09:01

Capita was under selling pressure on Monday morning after Citigroup cut its rating for the outsourcing group from 'buy' to 'neutral' on valuation grounds.Since January 2012, the stock's 12-month forward price-to-earnings (PE) multiple has expanded from 12 to 17, Citi said, adding "we no longer see marked additional re-rating potential.""Capita has returned to 10-15% PE premium to the sector. While this is below its 20-30% decade-average premium, this seems justified in our view by lower than decade-average organic growth and margin progression prospects."The broker expects Capita to record 8.0% organic growth for both this year and next year."Our proprietary public sector tendering analysis suggests a robust flow of opportunities but increasingly in newer areas for Capita (eg in Healthcare), which suggests their win rate may normalize to one in two or three from its more recent more than one in two. Encouragingly, financial services outsourcing momentum seems to be picking up after a quiet year."The target price for the stock has been lifted from 990p to 1,075p."We remain constructive on the UK outsourcing sub-sector but currently prefer Serco ('buy') over Capita on valuation grounds."The stock was down 0.98% at 1,007p by 09:51.BC