CPI: Fair Value Revisions Will Drive Re Rating As Earnings Power Builds

Analysts have raised their price target on Capita, with one firm lifting its target by £0.50. The change was attributed to updated assumptions around fair value, discount rate, revenue growth, profit margins and future P/E expectations.

Analyst Commentary

Bullish Takeaways

Bullish analysts see the £0.50 uplift in the price target as a reflection of higher estimated fair value, with revised models assigning more weight to Capita's potential earnings power over time.
Updated assumptions around revenue growth support the view that Capita could generate enough top line to justify a higher valuation, especially if it can convert contracted work into consistent cash flow.
The target move indicates increased confidence that future profit margins can align with the revised models, which feeds into higher projected earnings and a stronger base for P/E assumptions.
By revisiting the discount rate, bullish analysts are signalling that the perceived risk profile in their models is compatible with a higher equity value, provided execution stays broadly in line with expectations.

Bearish Takeaways

Bearish analysts focus on the fact that the revised price target still relies on assumptions around revenue growth and margin improvement that may be sensitive to contract delivery and cost control.
There is caution that the higher target is partly tied to future P/E expectations, which could be hard to support if earnings do not track the updated forecasts.
Some remain wary that changes in the discount rate and fair value estimates leave limited room for disappointment, so any shortfall in execution could have an outsized impact on the implied valuation.
Overall, the target lift is viewed by cautious analysts as model driven rather than evidence of already secured performance, which may keep them on the sidelines until they see more consistent delivery against these assumptions.

Valuation Changes

Fair value has risen slightly, moving from 5.09 to 5.40 in the updated model.
The discount rate has increased modestly, shifting from 10.81% to 11.06%, which implies a slightly higher required return in the valuation work.
Revenue growth assumptions have fallen significantly, from 1.31% to 0.54%, pointing to a more cautious view on top line expansion.
Profit margin expectations have edged lower, moving from 4.35% to 4.13%, suggesting a slightly more conservative stance on profitability.
The future P/E has risen from 7.58x to 8.72x, indicating a higher implied earnings multiple in the updated target framework.

Strong public sector growth and digital transformation are enabling Capita to secure high-value contracts and support sustained multi-year revenue growth.
Operational efficiency drives, automation, and strategic exits from non-core businesses are expected to improve margins, earnings stability, and capital returns.
Capita faces structural revenue and margin pressures from AI-driven industry shifts, regulatory risks, persistent cash outflows, and limited financial flexibility, challenging sustained growth and profitability.

Catalysts

About Capita

Operates an outsourcer that supports clients across the public and private sectors in the United Kingdom and rest of Europe.What are the underlying business or industry changes driving this perspective?

Capita is seeing robust growth in its public sector pipeline (with a £1 billion+ unweighted pipeline and over 50% TCV growth), supported by increasing public sector outsourcing due to fiscal constraints and a government focus on efficient service delivery-setting the stage for multi-year revenue growth and improved long-term revenue visibility.
Strategic investments in automation, AI-enabled platforms, and cloud-based solutions are already delivering hundreds of use cases internally and externally, enabling contract wins and operational efficiencies; this is expected to improve EBITDA margins over time as more contracts adopt digital delivery and automation.
Rapid digital transformation across private and public sectors is expanding the demand for value-added, digitally-enabled services and complex solutions, allowing Capita to shift its service and contract mix toward higher-value offerings-likely leading to better pricing power and higher net margins.
Capita's aggressive cost efficiency program (with £205m out of a planned £250m already executed) is embedding a culture and operating model focused on sustainable cost control; sustained delivery here will drive higher net margins and accelerate free cash flow generation, with the company targeting positive free cash flow by end of 2025.
Ongoing transformation of legacy operations, offshoring/nearshoring, and exits from non-core regulated businesses are structurally realigning Capita's cost base and capital allocation, which will reduce earnings volatility and improve return on capital over the long term.

Capita Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Capita's revenue will grow by 1.6% annually over the next 3 years.
Analysts assume that profit margins will increase from 0.7% today to 4.3% in 3 years time.
Analysts expect earnings to reach £106.8 million (and earnings per share of £0.6) by about September 2028, up from £16.2 million today.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, down from 16.6x today. This future PE is lower than the current PE for the GB Professional Services industry at 21.3x.
Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 12.85%, as per the Simply Wall St company report.

Capita Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The rapid acceleration of AI and automation in the BPO sector poses a risk of reducing demand for traditional outsourcing services
as Capita seeks to adapt, its Contact Centre revenues have already experienced material declines, which may signal ongoing structural revenue headwinds as clients look to technology-driven solutions over traditional offerings.
Persistent margin deterioration in the Contact Centres division, combined with the company's lack of scale relative to larger competitors and its later start in transformation, increases the risk that Capita will fail to achieve peer-level profitability, putting sustained pressure on group net margins and earnings.
Ongoing managed exits and contract handbacks in the Regulated Services segment are expected to result in continued annual cash losses, and the company forecasts further revenue declines in this area, challenging Capita's ability to drive overall group revenue and free cash flow growth.
Elevated net debt and recurring free cash outflows (with only a secondary expectation of turning cash flow positive in late 2025 and modest consensus projections for 2026) restrict Capita's financial flexibility, amplify sensitivity to macro or execution shocks, and limit the capacity to reinvest for sustainable growth, placing net profits and long-term shareholder value at risk.
The company's exposure to regulatory and reputational risks
illustrated by the Ofgem investigation into a subsidiary, legacy contract issues, and the need for rigorous compliance as AI is deployed in sensitive and regulated environments
could increase compliance costs, lead to potential liabilities, or dampen revenue from risk-averse clients.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of £4.315 for Capita based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.0, and the most bearish reporting a price target of just £3.21.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.5 billion, earnings will come to £106.8 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 12.9%.
Given the current share price of £2.37, the analyst price target of £4.31 is 45.1% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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