A joint venture (JV) with the Cabinet Office has pushed up shares in Capita (CPI) by 1.5% to 875p, but will the outsourcing specialist make a decent profit from the collaboration? Analysts are unsure, saying Capita may need to generate greater margins than its usual work in order to make any gains over the 10-year contract agreement.


Espirito Santo reckons the value of the agreement is 'close to zero'. This is based on Capita investing £38.2 million in the joint venture and a 14% operating margin (consistent with the group return). It adds: 'For the contract to return a positive value over 10 years, consequently requires the profitability profile to be in excess of group levels. This may be the case, but it highlights how the return profile from a JV contract can differ to the organic growth, implied by the headline fully consolidated revenue.'


Capita is creating a JV company with the Cabinet Office to commercialise the government's training tools and services. The latter has proprietary tools including project management methodology PRINCE2 and IT service management process ITIL. These are widely used in the public sector and there's growing take-up in the private sector. Revenues are generated through royalties from training material and fees.


The service group will own 51% of the JV. Capita will pay £10 million upfront and £9.4 million annually for three years. Today's announcement says that revenue is expected to be triple the current £40 million annual figure, by the tenth year of the joint venture. This would add 1.2% to group revenues and implies annual growth of 13%, says Espirito Santo.


CAPITA - Comparison Line Chart (Rebased to first)


As the chart shows, shares in Capita rallied between May 2012 and the start of this month, putting the shares at an all-time high of 913.5p (2 Apr). Yet investors have clearly been spooked by the broader stock market rally losing steam and Capita has been among the stocks ripe for a bout of profit taking.


The following pie chart illustrates the City's latest view on the stock, according to data from Broker Forecasts. There is an equal split between 'buy' and 'sell', each representing 38% of the votes, and 24% of the analysts community have the stock on 'hold'.


capita donut


Issue Date: 26 Apr 2013