Capita: Improving performance but more to do

Capita is a modern outsourcer, helping clients across the public and private sectors run complex business processes more efficiently and is listed on the premium segment of the London Stock Exchange. The company is a constituent of the FTSE All Share index and at the current share price of 13.5p has a market capitalisation of £230m.

Full year results to 31 December 2024 were published on 5 March 2025 and we were delighted to welcome CEO Adolfo Hernandez and CFO Pablo Andres, to a Yellowstone webinar to talk about the company’s 2024 full year results and the strategy and outlook for 2025. A recording of the webinar is available here.

Adolfo has been in his role for over a year now and these results reflect the changes he has made over that time.  He has started to sustain and simplify the good things that Capita does while beginning to improve the financial performance of the company. It’s been a busy year and whilst there have been a lot of improvements made there is still more to do.

In order to build a better company, Capita has focussed on four areas: Better Technology; Better Efficiency;  Better Delivery and Better Company (culture). Of these they have been exceptionally busy in the technology area as there was a lot to do. A key move has been in using the expertise of specialist IT companies and Hyperscalers ( AWS, Microsoft, Salesforce and ServiceNow) that have developed expertise in numerous technology areas rather than trying to do everything  in house. Capita’s expertise is in workflow processes and they can provide the best solutions in this area by using the most modern and cutting edge technology provided by others. A new Chief of AI and Product Officer, Sameer Vuyyuru (previously at AWS) has been appointed to lead this work.   In practical terms Capita is using Amazon Connect to build AI enabled business outcomes and has launched AI Catalyst Labs to identify, test and scale uses of AI-driven transformation.  Going forward the Microsoft Copilot internal rollout is going to be significantly expanded and they are particularly excited about working with Salesforce to find new AI automation opportunities.

Within their Contact Centres, 210 support colleagues use AI in their work and with 5,000+ agents being augmented by AI. AI tools will predict and suggest the best way forward, summarise the calls automatically systematically reducing the time to deal with enquiries. Handling and administration times have already been reduced.  Within Public Services, medical records processing has been automated and an automated workflow process has been implemented with local authorities to help them collect aged debt.  Within Pension Solutions, the service has been digitalised improving the overall service offering to customers by providing more real time information, improving the online portal and making it a more personalised experience. Services will rely more and more on AI augmented with a human connection and this is the direction of travel for Capita.

When Adolfo first arrived, he soon raised the cost cutting target from £60m to £160m by June 2025 and already £140m of these cost savings have been achieved. So far progress is ahead on both the quantum and the timeline and the cost target has been increased to£250m by the end of 2025. Again following the approach at Amazon, Adolfo believes you need to be frugal to improve focus and scarcity improves innovation.

Often when you make these sort of cuts the customer experience can suffer but the customer Net Promoter Score has almost doubled and in some cases Capita has won back business previously lost by providing better solutions at lower cost but with a higher margin.

In terms of improving the experience for staff at Capita it’s been a busy and tough year with the transformation and some difficult decisions around pay increases.. However attrition is falling, internal mobility is rising and engagement remains high at 64%.

In terms of the financials, a lot of work has been undertaken in improving the transparency of the financial reporting and new CFO Pablo Andres has been hard at work on this.

The highlight of the financial performance was a 50bps improvement in the operating margin to 4% alongside a 22% improvement in PBT to £50m. Pablo outlined that the margin improvement was even better than reported due to the £34m of one offs from the previous year which would have reduced 2023 margin to 2.2%.  Revenues declined 8% to £2,369m, EBITDA declined 5.3% to £186m, operating cashflow declined 12.9% to £72m and free cash flow before business exits was -£122.3m. Net financial debt (pre IFRS16) reduced to £66.5m benefiting from the Capita One and Fera disposal proceeds.

The largest division, Public Services experienced a slight decline in sales to £1,387m (whilst revenue improved in H2) but improved operating margins to 6.4%, on the back of £42.7m of cost savings. Operating cash flow came in at £92.1m and a respectable cash conversion of 73%. Contact Centres had a difficult year on the face of it with revenues falling 18% to £651m, operating margin decline to -0.9% and operating cash flow was only £0.1m. However the impact of one off contract losses and lower volumes in telecoms perhaps makes the performance look worse than it really was. On the positive side £43m of cost savings were realised. Through further savings this business is expected to be profitable in 2025. Pension Solutions is the best business with operating margins of 15.7% and cash conversion of 97.7%. Around a third of the business is a very well regarded pensions consultancy business.

The Regulated Services divisions, primarily the closed book Life and Pensions business, is one the company wants to exit and is making progress towards this aim. The division generated an operating cash outflow of £13.7m in 2024 and losses are expected to continue at this level going forward until the business is sold. The exit is a top priority for this year and discussions are well advanced. There is only 1 remaining customer exit to be agreed and they also understand the importance of a sustainable solution.

Cash generation has been under the microscope for a number of years and has been impacted by legacy deferred income flowing through the P&L. This figure is declining but still expected to be in the region of £50m for the next couple of years before declining. A more conservative approach to working capital led to a £54m outflow in 2024 although this figures is expected to decline going forward. A final pension deficit payment was also made. Overall EBITDA fell to £186m, operating cash flow fell to £72m, a cash conversion ratio of 39% and free cash flow (excluding business exits) fell to £16m. Closing net debt including capitalised lease liabilities was £415.2m. Some of the properties though are sublet as they are surplus to requirements and a corresponding financial asset of £96m is shown on the balance sheet. In Pablos’ opinion the true picture of net debt should be reduced by this amount to show c£320m.

The financial outlook for 2025 sees some improving metrics but the costs of achieving this means that 2025 will not be the year that the business generates sustainable free cash flow. Revenue is expected to be broadly flat, with Public Service showing growth and Contact Centre revenue declining. Margins are expected to show a modest improvement, free cash outflow (before the impact of business exits) is expected to show an outflow of £45-65m and net financial debt is expected to increase reflecting the free cash outflow. This figure includes £55m of restructuring costs. Further, the company is expecting to be free cash positive from the end of 2025. Investors will monitor progress on this metric with interest.

Another part of financial housekeeping covered was the share consolidation. The company is proposing to consolidate 15 shares into 1 share. This proposal came after feedback from investors who felt there was a negative stigma attached to being a penny stock. It is hoped that the shares will be of interest to a broader range of UK and international investors post consolidation.

Management concluded by looking forward into 2025 and the message is one of continuation of the progress made in 2024. The focus remains on delivering the cost transformation and improving sales to take advantage of the very good £11bn+ pipeline they have built up. Within the pipeline, £5bn has a heavy technology component and there will be more investment and innovation in this area.

The medium term targets were also reiterated: operating margins of 6-8%, free cash flow positive from the end of 2025, operating cash conversation of 65-75% and low-mid single digit revenue growth pa. Hitting the medium term targets would results in significant improvements to profits and cash flow. Current share price suggests some scepticism, in contrast to the CEO and CFO who have both recently added to their share ownership in the company.

A recording of the webinar can be found on the Yellowstone Advisory YouTube channel or by clicking here.

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