In addition, Capita provided a 45.9% return over the last month, in comparison with a negative 2.6% for the FTSE 250 Index.

However, go back to June 2015, and the value of returns changes considerably. Capita’s share price leaves the FTSE 250 behind having plummeted to a negative 90.6% return.

On the face of it, Capita appears to e bottoming out. Could its latest sales announcement be a good reason to begin investing in the firm?

The recent history of the Capita share price

Over time, the FTSE weighs up the values of its constituents and the share prices react accordingly. This is as true of Capita as it is/was of Serco, Carillion, and other peers. When the latter went bust at the beginning of 2018, rumours were that Capita would too. Indeed, Capita’s share price tumbled as investors were fearful of its prospects.

However, despite being in a similar industry, the competitors were very different businesses. Capita didn’t hide its problems behind accounting fraud, for starters. It also had some valuable assets, such as its software businesses. Indeed, one fund manager valued the business around 200p-220p per share in 2018.

Nonetheless, it’s a difficult business to value because the firm has fingers in many pies. Some pies will be growing as others are contracting. This makes it hard to attract investors because we never really know what’s going on.

Consequently, when one outsourcing business goes bust, it’s easy to assume others will too. And so Capita’s share price continued to drop.

The decline was reinforced by the apparent industry model to focus on revenue growth, rather than profitability. This was a dangerous position to be in for an industry bidding on fixed-price contracts.

And so it proved to be. Capita’s share price fell further as earnings tumbled and profits were non-existent.  

A possible future?

Enter turnaround specialist Jon Lewis and a new strategy to focus on hi-tech work, not low value,  labour-intensive contracts. Capita also appears to be streamlining its discombobulated operations. The company recently sold Eclipse, its legal software business, for £56.5m. Education Software Solutions is planned to follow and is expected to sell for 10 times the value of Eclipse.

It’s also likely more divestments will be in the offing as management tries to reduce debt and bring the firm back to profitability, which sounds great in theory.

However, the sheer scale of this long-overdue overhaul should not be underestimated as Capita’s balance sheet is uninspiring. Using its 2019 reported earnings figures, the company’s net debt is 12.6 times gross earnings. And earnings before interest and tax (EBIT) are non-existent — they do not cover the Capita interest payments on its debt.

In other words, Capita paying off its debt from its operations is going to be an uphill struggle. Selling assets is currently the only way to do it. Without profitable operations in core business elements, Capita will simply not be able to strengthen its balance sheet in the long run.

The turnaround must start somewhere and divesting assets will help sustain it in the short-to-medium term. However, I want to see positive earnings from core operations — whatever they may be — before investing my money. 

The post The Capita share price is starting to surge! Here’s what I’m doing now appeared first on The Twelfth Magpie.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Meanwhile, outsourcer Capita (LSE: CPI) has nudged back above the 100p mark after a recent dip below, but is another stock where you have to go back to the 1990s to find it last trading as low.

On the face of it, these look like two of the least-promising investment prospects in the FTSE 100 and FTSE 250, respectively. However, I think there’s a case for hardened contrarian investors to buy at these depressed prices.

All in the price?

A competitive trading environment, a recent regulatory price cap, and variables like weather and gas prices have all contributed to Centrica’s disappointing performance. However, its discount valuation relative to sector peer SSE, which faces similar headwinds, has me interested.

Centrica will be releasing its half-year results and a strategy update later this month. According to my sums the valuation, relative to SSE, implies the market is pricing in grim news. There’s a 13% downgrade to current-year consensus earnings forecasts, a 21% downgrade to next year’s, and a dividend cut of the order of 45-50%.

It strikes me that if all this is already in the price, further downside would require a monster profit warning and suspension of the dividend.

However, if current consensus forecasts for earnings (8.2p this year and 10.2p next year) and dividends (a 33% cut to 8p) are maintained, and the stock rerates to something like SSE’s valuation, we’d be looking at a share price in the region of 100p-110p.

Picking up pennies in front of a steamroller or a decent risk-reward contrarian play? I’m leaning towards seeing it as the latter.

Historic clouds clearing?

Capita was at one time a FTSE 100 company and a market darling. However, like many in the outsourcing sector, its business unravelled quite spectacularly a few years ago. As a result, a lot of investors probably wouldn’t give it a second glance today.

I think it could be time to forget the past and look at Capita afresh. Refinanced and under new management, the company successfully completed year one of a three-year turnaround plan in 2018. Now halfway through year two, we’ve had no update on trading since the annual results were released in March. So it looks like the company is on track to achieve its goals and guidance for this year too.

Management has done a good job so far and has a credible strategy to achieve its 2020 targets of double-digit profit margins and at least £200m of sustainable annual free cash flow. However, I think historic clouds are perhaps still hanging over market sentiment at this stage. On City consensus forecasts of 12.7p earnings this year, followed by 20% growth to 15.2p next year, the P/E is a dirt-cheap 8.4, falling to just 7.

I reckon the stock could be a good contrarian buy at the current level, with prospects of both improving investor sentiment and trading performance driving returns.

The post Should I buy the Centrica share price at a 21-year low? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As much as my bearish stance on Purplebricks has so far played out, my bullish stance on Capita (LSE: CPI) has, to date, proved woeful. Having rated the stock a ‘risky buy’ at 160p in June — and at considerably higher prices previously — the shares are now trading at a dismal 130p. Do I still see Capita as a good higher-risk buy, or have events since June changed my view?

More questions than answers

Purplebricks issued a trading update yesterday, ahead of half-year results scheduled for 13 December. At the time of its last annual results, management gave guidance on its revenue expectations for this year (the company’s financial year ends 30 April 2019). That guidance was for £165m-£185m and I noted in an article at the time that the consensus among City analysts was towards the top end of the range, at £183m.

Management reiterated the guidance in yesterday’s update. However, over the last few months, the City consensus has moved to the bottom end of the range, and currently stands at £167m. The company gave no concrete revenue numbers for the first half of the year. It did say UK revenue had grown approximately 20% year-on-year, from which we can deduce a rise to around £56m. But with no clues to first-half revenues in its international markets, it’s impossible to calculate what the group has to achieve in the second half of the year, and to assess the risk of a revenue miss.

With the trading update raising more questions than answers, I can’t see the stock soaring anytime soon and I’m minded to avoid it at this stage. The numbers in next month’s results will tell us more.

Recovery play

I was long bearish on the outsourcing sector, but viewed Capita as the strongest of a bad bunch. That it’s done better than Carillion isn’t much of a boast. We’re now looking at a business that’s been through the mill and a stock that’s a potential recovery play.

When I wrote about the company in June, my optimism was based on a number of factors, including management changes, disposal of non-core assets, and winning new contracts. I felt the Carillion collapse could lead to more sustainable contracts, enabling Capita — in time — to make decent margins on its multi-billion revenues.

Whether that will play out remains to be seen. But margins should certainly improve as a result of management having “identified a significant multi-year opportunity to reduce costs and improve operational efficiency.” 

My optimism has been further bolstered by the company saying in August that disposals of non-core businesses are ahead of plan, as well as by positive contract news in more recent months. This includes re-selection for a £65m contract with Westminster City Council, announced today. With the shares trading at less than 10 times forward earnings, I continue to rate the stock as a good, if higher-risk recovery ‘buy’.

The post Could the 180p Purplebricks share price be set to fly back over 500p? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, a few shrewd analysts began to question the underlying performance behind outsourcers’ multiple acquisitions, the way they booked revenues and the high debt and lack of tangible asset backing. They were right to do so, because these chickens came home to roost, most notably with the collapse of Carillion.

Huge turnaround potential

Back in January, I wrote that I’d sell Carillion at almost any price but I rated Capita a ‘buy’, albeit one with elevated risk. My optimism proved misplaced. The shares were trading at 410p at the time but are changing hands at around 160p, as I’m writing.

The fall of Capita from its high of over 1,300p has been spectacular, taking it down the FTSE 100 and into the second-tier FTSE 250. There are probably private investors who will never go near the stock again and with big FTSE 100 tracker funds no longer holding it and it also being unappealing for equity income institutional investors (the dividend has been scrapped for the time being), this has got to be one of the most unloved companies around.

However, because of some positive developments since my January article, I continue to rate Capita a higher risk ‘buy’ but one with huge turnaround potential from the now thoroughly depressed share price. Further management changes, a balance sheet bolstered by a £700m rights issue, progress on the disposal of non-core assets and the winning of new contracts all give me cause for optimism.

I believe the Carillion disaster should lead to outsourcing contracts being awarded more on a best value basis than simply to the lowest bidder. If Capita can make any kind of decent margin on its multi-billion revenues, which I believe it will be capable of, I can see the shares rising strongly in time, as the market regains confidence in the company.

Temporary setback?

Global medical products and technologies company ConvaTec (LSE: CTEC) was London’s biggest flotation of 2016. Its 225p-a-share IPO valued it at £4.4bn and its shares were trading at over 300p the following year. However, late in the year, the shares dived when the company reported some significant operational issues. The collapse in its market cap led to it being demoted from the FTSE 100 in December.

I viewed these operational issues as temporary and felt comfortable with management’s confidence in resolving them. In an article at the time, I wrote: “Given the growth and margin progress that was being made up to this point and the fact the shares have slumped so far (near to 180p), I see merit in buying a small stake in this higher risk/reward turnaround situation, perhaps adding on an improving outlook.”

The company has indeed made progress. In a Q1 trading update last month, it said: “We have delivered a solid start to the year, underlining 2018 as a year of stabilisation.” The shares have recovered to 215p at the present time and I continue to rate the stock a ‘buy’ at this level. I believe the business has a bright future in the attractive healthcare sector.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

No support

International support services and construction group Interserve (LSE: IRV) has given investors an unwanted rollercoaster ride, amid profit warnings and fears over breached banking covenants. Its stock is down 54% over 12 months, up 28% over the last week, and down 13.54% this morning on publication of its annual 2017 results.

Today’s report showed a small rise in revenue, from £3.24bn to £3.25bn, but that was almost the only positive number. Total operating profit halved from £155m to £75m, the group’s loss before tax of £94m widened to £244m amid hefty writedowns, while headline earnings per share (EPS) crumbled by two thirds from 84.5p to 29p.

White stuff

Throw in a near doubling of net debt, from £274m to £502m, and you can see why investors are feeling so queasy. Worse, the group’s debt could rise to £680m in the second half, before improving slightly. Investors are ignoring one sign of hope, that the Berkshire-based group has secured full debt refinancing with committed borrowing facilities of £834m, through to 2021

New chief executive Debbie White claims her “fit for growth” plan will deliver an annual benefit of up to £50m to operating profits by 2020, £15m in the current year.

This is an opportunity for fearless contrarians given Interserve’s lowly valuation of just 6.2 times earnings, especially since it has future workload of £7.6bn, following a string of key contract wins in the year. These include the Ministry of Defence, Ministry of Justice, Department of Work and Pensions, Network Rail and the BBC, amid similar success in the Middle East. Interserve, which has a market cap of £132m, is a gamble, but a potentially rewarding one. My Foolish colleague Peter Stephens finds it tempting.

Capita crash

FTSE 250-listed Capita (LSE: CPI) has also left investors with churned stomachs, its share price crashing from 1,326p in July 2015 to just 187p today, down a thumping 85%. However, it is up 24% in the past week. Could this be your opportunity to hop on board for the next upwards swing?

The £1.25bn company’s numbers are absolutely all over the place, with a rock bottom valuation of just 3.3 times earnings, combined with a dizzyingly high yield of 16.9%. Don’t be fooled by that final number, the forecast for 2018 is a rather less rewarding 0%.

Comeback kid?

The recovery process may be slow and we are only in the early stages, as Capita changes its business model and launches a rights issue to generate extra capital. EPS are still expected to crash a massive 44% this year, and another 5% in 2019. Revenues may also dip slightly, although pre-tax profits may pick up a little, suggesting the stock has comeback potential.

Like Interserve, Capita has fallen so low, many will feel that the only way is up. History shows that companies take a long time to recover from such a bumpy ride, so if you are tempted, brace yourself for further highs and lows.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, the reward potential of turnaround stocks may also be relatively high. Investor sentiment towards them is often weak, and this may mean that there is relatively high upside potential on offer over the long term.

With that in mind, here are two FTSE 250 shares which are currently experiencing difficulties. In the coming years, though, they could deliver significant total returns.

Difficult outlook

The performance of outsourcing specialist Capita (LSE: CPI) has been hugely disappointing in recent periods. The company has experienced a challenging set of market conditions, with there being significant uncertainty regarding the future prospects for the outsourcing industry. This is expected to contribute to a fall in its bottom line of 43% in the current year, followed by a further decline of 5% in the next financial year.

Clearly, such a significant fall in earnings is likely to hurt investor sentiment. Indeed, it appears as though the market has little confidence in the prospect for a successful turnaround. The stock trades on a price-to-earnings (P/E) ratio of 7 using next year’s forecast earnings figure. This suggests that more falls in profit are being priced-in by investors.

However, Capita is making changes to its business model. It recently launched a rights issue, which could provide it with the capital it requires to reinvest for future growth. And with a rationalisation of its asset base, as well as a refreshed management team, it has the potential to deliver a successful comeback in the long run.

Improving outlook

Also offering the potential for a successful turnaround is greetings card retailer Card Factory (LSE: CARD). The company is experiencing a challenging period at the present time, with consumer confidence being at a relatively low ebb. This is contributing to a declining bottom line, with its net profit expected to drop by 1% in the current year after last year’s decline of 5%.

Despite this, the company is due to report a turnaround in the next financial year. It is expected to deliver a rise in earnings of 5%, which could catalyse investor sentiment. And with inflation now being behind wage growth, it would be unsurprising if consumer confidence improved to at least some degree. This could cause the company’s sales and profitability to improve at a faster rate than the market is currently anticipating.

With Card Factory having a dividend yield of over 6% at the present time, it appears to offer good value for money as well as a high level of income return. As such, it could prove to be a worthwhile recovery share that may post impressive total returns.

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Peter Stephens owns shares of Card Factory. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Since I last looked at the company back in December, stock in the £1bn cap — which provides ‘efficiency’ services to a wide range of businesses in the public and private sectors — has continued to sink in value. Much of this can be attributed to January’s announcement that it would be launching a £700m rights issue in order to bring the company back on track following a spate of profit warnings.

More recently, Capita has revealed that it has created a new position — the interestingly-titled Chief People Officer — who will take a broom to the company’s staff roll. The successful candidate and former Amec Foster Wheeler man, Will Serle, now supports CEO Jon Lewis in the latter’s attempts to the turn the struggling company around. 

Although full-year results have now been delayed while the aforementioned (heavily discounted) rights issue is finalised, we do know that Capita also plans to offload a number of its businesses to address its seriously overburdened balance sheet as well as focusing on those markets that offer the greatest upside in terms of growth.  

Investing in turnaround stocks can be a profitable endeavour so long as you possess sufficient skill or luck in selecting the right companies. When it comes to Capita, however, I think the risk of further downward pressure on the share price remains too great.

Instead, I’d consider industry peer Kier Group (LSE: KIE).

A safer bet?

Today’s interim numbers, while falling short of analyst expectations, weren’t disastrous. Underlying revenue rose 8% to £2.15bn in the six months to the end of 2017. Underlying pre-tax profit also increased by 5% to £48.8m. Positively, the Sandy-based business reported good returns on the money it has invested in both its Property and Residential divisions (23% and 11% respectively). 

Looking ahead, Kier revealed that 100% of its forecast revenue in its Construction and Services divisions had been secured for the year to the end of June and more than 65% secured to June 2019. The order book here now sits at £9.5bn. There’s also a £3.5bn pipeline in its Property and Residential Divisions.

According to CEO Haydn Mursell, the £1bn cap’s portfolio gives the company “balance and resilience“.  He went on to reflect that the firm looks set to deliver “double-digit profit growth” in 2017/18 and remains on track to achieve its strategic targets.

In contrast to Capita, Kier’s balance sheet appears in far better shape. Although net debt rose to £239m (from £179m in the previous year) as a result of ongoing investment, this is expected to be equivalent to “less than 1 times” earnings before interest, tax, depreciation and amortisation (EBITDA) by the end of June. A reduction in the company’s “minimal” pension deficit to £19m is also encouraging and a massive contrast to the situation at Capita. 

While a 2% hike to the interim dividend may not seem much, it’s also worth mentioning that Kier is forecast to yield a (seemingly affordable) 6.8% yield in the current financial year. 

Trading on 9 times earnings, I think the business warrants attention from those looking for value and/or income.

The post One bargain stock I’d pick over Capita plc appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One thing I’ve learned is to look for businesses which have the potential to generate high returns when times are good. This is why I’ve recently been taking a look at Capita (LSE: CPI), whose shares have fallen by 85% from their July 2015 high of more than 1,300p.

I’ll come back to Capita in a moment, but first I’d like to take a look at a turnaround I chose not to buy. Was I wrong to say no?

Operating profit doubled

Shares of construction and infrastructure group Balfour Beatty (LSE: BBY) were up by 3% at pixel time, after the firm released a much-improved set of full-year results.

Underlying profit from operations rose by 184% to £196m last year, thanks to a broad-based improvement in profit margins.

Balfour managed to achieve average net cash of £42m through the year, compared to average net debt of £46m during 2016. The group’s bank balance also received a year-end cash boost, thanks to the £103m received for a partial sale of the group’s stake in the M25.

Shareholders will be rewarded with a total dividend of 3.6p, a 33% increase. This may seem small compared to underlying earnings of 20.9p per share, but I believe chief executive Leo Quinn is right to be cautious.

No regrets

The group’s underlying revenue and profits are expected to be fairly flat in 2018, despite Balfour being “on track for industry-standard margins in [the] second half of 2018″.

However, the group’s results show an operating margin of just 1.3% and a return on capital employed of 3.9% in 2017. Both figures are better than in 2016, but they’re still low by most standards.

Although I expect further gains in 2018, I don’t think the firm’s forecast P/E of 15.4 and prospective yield of 2.3% are cheap enough to be attractive.

Is it time to buy Capita?

Troubled outsourcing group Capita is said to be planning to reduce its focus on UK government work under new chief executive Jonathan Lewis.

Mr Lewis is expected to unveil his strategy for the outsourcing firm next month, alongside details of a major fundraising.

All we know so far is that the company has already put in place underwriting for issuing up to £700m of new shares. That’s equivalent to 65% of the current £1.07bn market cap.

It’s probably fair to assume that the new shares will be issued at a discount to the current share price, so my estimate at this point is that the rights issue could double the number of shares in circulation.

I should stress that this is only a guess. But if I’m right, then this would mean that forecast earnings per share for 2018 would fall from 29.6p to 14.8p following the rights issue. Based on the current share price, the stock might trade at around 135p after the rights issue. That would give a 2018 forecast P/E of 9.1.

That seems high enough to me, until we know more about the outlook for the next couple of years. Shareholders often suffer when company debt gets out of hand. I plan to wait until after the rights issue before considering whether to invest in this turnaround stock.

The post Is Capita plc poised to deliver a monster turnaround? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Further difficulties could be ahead as the business seeks to turn around its performance. That’s why it may be worth avoiding it in favour of a smaller company which released an encouraging update on Monday. While potentially risky, it could deliver higher returns than its larger peer.

Impressive outlook

The company in question is global Spend Control and eProcurement solution provider Proactis (LSE: PHD). Its revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) growth during the first six months of its financial year has been strong. It now expects to report a rise in revenue of 123% in the full year, with EBITDA now forecast at 183% higher.

The acquisition of Perfect Commerce is making a significant impact on the company’s performance and has traded in line with expectations since the purchase. The company has also made strong progress in delivering the cost synergies it identified at the time of the acquisition. The net annualised value of those synergies made to date is £3.3m, with the business on track to deliver on its target of £5m by the end of the financial year.

With Proactis forecast to report a rise in its bottom line of 28% this year, followed by growth of 26% next year, it seems to be delivering on its potential. It trades on a price-to-earnings growth (PEG) ratio of just 0.4, which suggests that it could offer a significant upside. As such, while a relatively small business, it could be worth buying for the long run.

Challenging outlook

While Capita may be able to deliver a successful turnaround under its new management team, the company’s prospects appear challenging. It’s expected to report a bottom line decline of 34% this year, followed by a further fall of 3% next year. This could cause investor sentiment to dip yet further, and may mean its valuation comes under pressure.

Furthermore, it’s likely to take time for it to reorganise its asset base and to see the return on planned investment in core areas. Within a difficult marketplace, this could mean that it delivers several years of disappointing profitability. And even though it’s seeking to conduct a rights issue of up to £700m, the cost to turn around its overall performance could lead to a degree of pressure being placed on its financial resources.

Certainly, Capita’s price-to-earnings (P/E) ratio of around 6 is relatively low. It could indicate a wide margin of safety is being applied by investors. However, it may also prove to be a value trap, since it appears to lack a clear catalyst to push its share price higher. As such, it seems to be a stock to avoid at the present time.

The post Why I’d sell 60%-slumping Capita plc to buy this small-cap stock appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why? There are two key reasons. First, Capita’s share price reaction is partly driven by the fear that the company could soon follow in the footsteps of Carillion, a scenario that seems very improbable to me. Second, a potential turnaround at the company could deliver serious upside for shareholders, given its current valuation.

Capita isn’t Carillion

I hope it’s not confirmation bias that has driven me to think Capita is not another Carillion, as there are some very noticeable differences between the two companies.

Firstly, Capita’s balance sheet is in much better shape than Carillion’s was a year ago. Although both had big debts and pension deficits running into the hundreds of millions, Capita’s financial liquidity is much more robust, as the company has more than £1bn in cash at the bank. Moreover, it also plans to raise £700m in fresh equity to further strengthen its balance sheet and to starve off a liquidity crunch.

Secondly, Capita is a different kind of outsourcer to Carillion. It isn’t involved in the sort of construction contracts that Carillion tripped up over. Instead, Capita offers services such as collecting the TV license on behalf of the BBC and helping private sector clients manage back office tasks.

Turnaround prospects

Capita has had similar problems to Carillion, such as relying too heavily on acquisitions and bidding too low to win contracts, but it’s in much better shape to deliver a turnaround at the business.

There’s still value in the outsourcer’s contracts, with Capita still set to generate between £270-300m in underlying pre-tax profits in 2018. There’s a plan to simplify the business, by selling non-core assets, and I reckon it has the right person at the helm of the company. CEO Jonathan Lewis is a well-respected turnaround specialist, having previously taken on the job of troubleshooting Amec Foster Wheeler.

Analysts at HSBC suggest a turnaround scenario could over time lead to a doubling in its share price, although it reckons it is too early to factor that into the valuation right now.

A better turnaround play?

Another turnaround play that may be worth a closer look is Petrofac (LSE: PFC), the mid-cap oil services company that’s been embroiled by a corruption investigation by the Serious Fraud Office (SFO).

Shares in Petrofac took a tumble this week as the company warned its shareholders that the SFO was deepening its investigation into alleged bribery, corruption and money laundering. If Petrofac is found to be guilty, it could face the prospect of a multi-million pound fine, which could greatly hurt its balance sheet and its ability to win new contracts.

New orders

So far, though, its higher counterparty risk has done little to hurt Petrofac, as it continues to secure new business at a robust pace. The company secured $5.2bn worth of new orders in 2017, bringing its order backlog to a total of $10.3bn, which reflects an impressive recovery from a year ago.

This demonstrates its strong underlying fundamentals, which is underpinned by its focus on the Middle East, where the relatively low costs of production in the region have shielded the company from the savage cuts to capital spending in the oil & gas industry.

The post Why I’m sticking with Capita plc for now appeared first on The Twelfth Magpie.

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Jack Tang has a position in Capita plc. The Motley Fool UK owns shares of Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.