Livingstone could of jeopardised his future

THE Mayor of London, Ken Livingstone, may have put his political future on the line when he introduced the concept of road users paying to enter London.

This new Congestion Charging system was successfully launched last month with knock on benefits for the Mayor and for FTSE100 company, Capita.

The job of administering the new system was awarded to Capita and now it transpires that some 20 other UK cities are looking at the London model.

Capita is now the UK’s leading provider of out sourced services for Government and local councils. Capita is currently trading at £2.35 and has a market capitalisation of approximately £1.6 Billion.

Capita provides an integrated range of white collar, professional support services on long term contracts to both the private and the public sector.

While the company’s roots lie in providing outsourcing services to government, recent acquisitions have moved the company into the education market and also boosted its private sector presence. Capita’s share price declined by around 50% over the course of 2002, as growth stocks globally were de-rated.

Unlike many of its peers, however, profit forecasts for Capita continued to be upgraded over this period.

Visibility of future revenues, one of the key attractions of the stock, is exceptional, with 14% growth in 2003 already confirmed based on contracts won over the past year.

Trading on a P/E of 18x 2003 forecast profits, the stock looks inexpensive, especially when considered in light of the market opportunity available and the company’s track record of delivering superior growth.

Earnings per share growth has averaged 37% over the past 5 years, with 34% forecast again for the current year.

While difficult to quantify, the market opportunity is enormous. Capita’s management estimate that the UK BPO market alone could be worth in excess of £65bn, with key drivers including the need to modernise service and reduce costs in both the public and private sectors.

While competition exists, no other company offers the full range of services provided by Capita, allowing Capita to bid for some of the larger, more complex contracts currently being offered by Central Government.

The high profile nature of some recent contract wins, e.g.. the Criminal Record Bureau and London Traffic Congestion Charging contracts, highlights the company’s reputation for service delivery. Visibility of revenues is one of the primary attractions of investing in Capita. Given the long -term nature of the contracts involved, the company can forecast with some degree of certainty future revenue growth.

For example, at the time of the interim results in July 2002, management quantified that 97% of 2002 forecast revenues were underpinned by existing contracts.

In addition, contributions from new contracts won during 2002 already underpinned 14% growth in FY 2003 revenues, with the potential for upgrades to this figure if new contracts are announced over the course of 2003.

Capita is one of a number of stocks highlighted in Goodbody’s recent report “Better Days Ahead”.

This report aims to identify Irish and UK stocks that are expected to respond positively to an improvement in equity markets.

To obtain a copy of this report, please contact Goodbody Stockbrokers at 021-4279266 or 01-6670400.