Wednesday newspaper share tips: Capita

11th May 2016 12:49

(ShareCast News) - There is something to be said for being boring, but at the same time steady and predictable, the Financial Times's Lex column said referring to Capita. The outsourcer came out of the back-half of 2015 sporting a ratio of net debt to earnings before interest, taxes and depreciation of 2.5, which Jefferies judged to be consistent with the need for an equity raise.So-called "unusual" costs had also taken a small step up.However, in its trading update the outsourcer guided towards net debt/EBITDA for the year at 2.3 and pegged organic revenue growth at 4% for 2016.Capita also extolled the virtues of capital discipline when explaining why it abandoned a bidding war for Xchanging.Indeed, one of the company's key competitive advantages versus the likes of Serco or G4S is the lack of contractual disasters for which those two have become infamous."Knowing when to say no is valuable in an industry that reliably punishes the gung-ho. Long may Capita stay boring," Lex said.Markets' pessimism around Capita appears overdone but it is not yet time to jump in, The Times's Tempus said.An admission by the outsourcing specialist in February that its pipeline of potential work had fallen sharply and the average length of contracts hit the price of its stock and it is still trading near two-year lows.However, several factors are pointing to a brightening outlook as the year progresses.For starters, at its annual meeting on Tuesday the company said contract wins year-to-date had hit £458m, not far off from the tally for the same period of last year if one strips out the £700m from the Department for Environment, Food and Rural Affairs' science partnership contract.Yes, some potential clients are taking a bit longer to make up their minds, management readily admits.Nonetheless, the basic model of steady growth augmented by select acquisition appears to be intact.In February, the company also bumped up its margin forecasts a tad and no big contract renewals are due this year.Also, there is little likelihood of a rights issue to embark on new acquistions, the tipster said.Guidance for organic revenue growth of at least 4% in 2016 appears attractive enough too, yet with the shares trading at 14 times profits "That does not suggest an immediate "buy" given the residual market doubts".The shares were best avoided for now, Tempus concluded.