Capita is worth the premium

Outsourcer Capita goes from strength-to-strength and there's little not to like. In the first half of this year it increased underlying pre-tax profit by 16% to £238 million on revenue up 14% to £2.07 billion, most of it organic. It won £1.3 billion of big contracts, too, and a record bid pipeline bodes well for next year. The only stumbling block is valuation, but even this may not be insurmountable.

That's because of Capita's impressive record. It wins two out of every three major contracts it bids for - this year it bagged 12 biggies, including deals with BAE Systems, the Ministry of Defence and John Lewis. It also won back the congestion charge gig with Transport for London which it lost to IBM four years ago. Hopefully, the magic will work on that £5.7 billion bid pipeline.

"We are continuing to see a high level of activity across our markets, particularly in the private sector, providing a strong future platform for growth," said chief executive Andy Parker. There's especially strong interest in newer growth sectors like justice - it already runs UK electronic monitoring operations - and emergency services and across the telecoms, retail, utilities and financial services sectors.

Capita generated £291 million of cash from operations during the period, up over a fifth, and reckons a tight grip on costs will deliver annual cash conversion at or above 100% over the medium to long term. And post-tax return on average capital employed increased by 30 basis points to 15.4%.

Investec Securities upgraded forecasts for 2014 by 3% and now expects adjusted pre-tax profit £521 million, giving adjusted earnings per share of 64.3p. It's £567 million and 69.9p for 2015.

Up 4% to 1,197p, Capita's share price currently sits at a record high, putting them on a forward price/earnings ratio of 18.6. That drops to 17 for next year, and while that's clearly no bargain, the business has obvious momentum and thoroughly deserves a premium to peers. There could be modest upside here.

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