Capita PLC (LON: CPI) shares dropped 10 pence, or 21%, this morning on a trading statement showing no growth in gross revenues at the outsourcing giant. The long-awaited turnaround is taking longer to arrive than hoped that is.
The importance for us here as traders is that it shows how important expectations are in share valuations. Markets are forward-looking and it is what comes next which matters. Capita’s share price has depended recently on expectations of how well that turnaround was going. When the real numbers are announced and they’re OK, sort of, then the Capita share price drops that 21%.
We are, that is, always trying to work out what is going to happen, not what has. This is also where the trading mantra, buy the rumour, sell the fact comes from. It is what people think is going to happen that drives that current share price, as here at Capita.
For Capita’s indicated – remember, this is a trading statement, not the actual – results, aren’t that bad. We all know that covid has knocked a lot of service businesses for six. Yes, it’s true that outsourcers like Capita have gained varied contracts as a result of government needing to do more things. But no one was hugely ambitious for the results.
Revenue from those public sector contracts is up from £649 million to £708 million for the period. Both operating margin and gross profit on that higher revenue have increased, the operating margin has actually doubled to 6%.
But that’s not the sector of Capita that investors want to see growing particularly. There’s been so much concern about those public contracts since Carillion’s collapse (and to a lesser extent, Amey’s problems with the Birmingham contract) that it’s just not thought of as an appealing sector to go looking for business.
Of more importance to future prospects is the “Experience” division and there the turnaround is rather slower. Revenue is down even as margin and operating profit are up. That’s not what investors were hoping to see.
When the different performances across Capita are put together this adds up to flat revenue for the half-year which just isn’t what was being looked forward to at all, thus the share price drop at Capita this morning.
The future share price will likely be driven by consideration of those future prospects. When – if – will the Experience division start to properly motor and see revenue gains? As belief in this grows, if it does, then we might see a recovery in the Capita price. The trading opportunity is to be ahead of any such change in sentiment. The risk is that the change will or won’t happen.
It’s possible that in the second half revenues will grow, it’s also possible that they won’t. The share price will move on sentiments as to which will happen – that rumour – and then crystalise at the next trading statement and results announcements. Expect volatility as those sentiments change over time.