Free share tips posted weekly! This week’s free share tip is Capita (CPI).

If investors wanted evidence that the market offers up good trading opportunities, then they need look no further than the share price of Capita.  Regular subscribers to cityconfidential may recall that we tipped the company as one of our Shares for 2021 when the share price was 36.75p back in January 2021.   We then tipped the shares again on 19 May, when the share price was 41.89p as our free tip for the week.  As the company had featured in our Shares for 2021, it was included in the Aggressive Growth Portfolio in the newsletter, but following a strong run in the share price, we took some profits in the August issue of the newsletter, selling shares at 49.79p.  We then sold the remaining shares at 48.76p the following month.  To say that these sales proved well-timed is an understatement.  The shares moved to a high of 52.75p in September before drifting lower and the sharp fall in the share price at the start of this week has taken them back to levels not seen since the summer.   

The collapse in the share price has been caused by a trading update covering the 11 months to 30 November.  Although the statement was not too bad it was not well received by the market with the share price falling by almost 19% on the day to 36.75p.  It now seems to have stabilised at around the 36p level and we believe that this has presented a buying opportunity for brave investors.

The trading statement revealed that revenues in the first 11 months of the year had risen by under 1% which was less than expected.  Nevertheless, the results for 2021 will be not far off previous expectations, with revised forecasts for adjusted pre-tax profits being around £100m for earnings per share of 4.7p.  However, the company is well on track with its disposal programme of non-core businesses with £620m of proceeds being received against a target of £700m by the end of H1 2022.

Inflationary cost pressures and the negative impact of Covid have led to forecasts for 2022 being reduced, however, and this is the main reason for the share price fall.  Although this is clearly disappointing, we believe that the share price has overreacted significantly providing scope for recovery.  Even on reduced forecasts for 2022, the company could make underlying pre-tax profits of £130m for earnings per share of around 6p.  There is unlikely to be any dividend as the company continues to reduce its debt but clearly a prospective p/e ratio of around 6x provides scope for a significant re-rating.  The shares are a SPECULATIVE BUY.

Read more of our free share tips here.