Broker snap: UBS upgrades Capita to buy

28th May 2012 11:37

UBS has upgraded its rating for outsourcing group Capita from neutral to buy on the back of improving trading momentum combined with a depressed valuation.Increased M&A activity has coincided with two years of negative organic revenue growth meaning that the stock has put it the worst performance in its immediate peer group, the broker said in a research note on Monday. This, along with increased working capital consumption driving debt up, has pushed returns and valuation multiples lower. "Analysis of the largest recent acquisitions has given us comfort regarding the quality of the businesses acquired, the financial dynamics and, most importantly, their clear links to attractive and growing markets."The M&A strategy will not be 'proven' until Capita delivers a sustained return to organic growth, but the scope to do this in markets new (central government administration, health, police) and old (local government) is tangible," the broker said.The valuation is at an all-time low and, with the government bid pipeline acting as a near-term catalyst, UBS says that it presents a good buying opportunity. The broker has raised its target price for Capita from 700p to 725p.BC