Market Report: Capita loses its bounce after worries over margins

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The Independent Online

Punters may have been flocking back to Capita recently, but last night the brakes were put on the outsourcing giant's rally. The group – which had managed to add nearly 19 per cent over the previous six sessions – was left in the red after City scribblers warned there were still causes for concern.

Capita's bounce, which saw it close at its highest share price in nearly a year on Wednesday, was largely driven by its impressive full-year figures last week, as well as relief following a number of recent contract wins. Yesterday, however, it edged back 3p to 764p after UBS said that although its final results were reassuring, there were still issues that needed to be tackled.

One of these was margins, with the broker's analyst William Vanderpump warning that there were "more headwinds than tailwinds". He pointed out that a number of contracts it has been awarded recently have had margins below the group's average, while adding that the same was true for many of the businesses Capita has snapped up over the past few years.

Mr Vanderpump also argued that the company's return on capital needed to improve "to sustain the recent rerating and the longer-term investment case", and as a result he kept his "neutral" rating. However, he did raise his target price from 650p to 725p, saying that "positive organic growth in [this financial year] seems secure".

Having seen a sharp drop on Wednesday, the FTSE 100 jumped straight back above the 5,900 level, advancing 59.74 points to 5,931.25. It may have been a mixed session for economic news – with UK manufacturing data encouraging, while counterpart figures from the US didn't – but the market was happy to look on the bright side, although IG Index's David Jones noted it was "still searching for the positive catalyst needed... to push higher".

Royal Bank of Scotland and Lloyds dipped 0.17p to 27.75p and 0.16p to 34.78p respectively after Berenberg's James Chappell warned that the economy was currently suffering a "period of financial repression" which was "a very poor environment for bank profitability".

As a result, he cut his advice on all of the UK-listed sector to "sell", apart from HSBC, which ticked up 13p to 568.3p. However, Barclays managed to shrug off the downgrade, climbing 6.15p to 251.15p, as did Standard Chartered, which shifted up 21.5p to 1,639p.

Vague speculation continued to grow that GDF Suez could soon make a move for the 30 per cent of International Power it does not already hold, as the power generator sparked up 4.2p to 350.1p. However, traders were dismissive, noting the decision earlier in the week by International Power's chief financial officer, Mark Williamson – who will soon join GDF – to sell all of his shares.

Down on the FTSE 250, Cable & Wireless Worldwide continued its recent recovery after India's Tata Communications announced it was mulling over whether to make a move for the telecommunications group. With the news coming a matter of weeks after Vodafone (up 2.45p to 171.8p) said it could be interested, punters dreaming of a potential bid battle pushed CWW 4.1p, or 14.71 per cent, higher to 31.98p.

The recruiters were on the rise after Goldman Sachs' analysts raised their forecasts across the business services sector, citing their "more positive outlook". Hays pushed up 4.7p to 85.25p, while Michael Page was 24.1p better off at 477.7p, with the two also helped by a positive reaction to results from both Swiss rival Adecco and small-cap peer Robert Walters (up 9.75p to 239p).

Having seen its share price more than double in a mere six sessions, Thomas Cook was losing altitude again after Investec decided that the tour operator had gone high enough. Analysts from the broker sparked the rally last week by claiming that fears over its long-term future were overdone, but yesterday they reduced their "buy" rating to "hold, saying "the gap between... pricing in failure and survival has been bridged".

They also played down takeover hopes, and in response the group slumped 20.35 per cent to 22.5p on the small-cap index, although it is still nearly 75 per cent higher than before the bounce began.

Ithaca Energy spurted up 24.75p to 199.75p on AIM after announcing that a number of potential aggressors had made their interest known. The oil and gas group had received an approach earlier in the year, and the news that there were more interested parties prompted traders to suggest that a potential price could reach as high as 250p a share, although Ithaca pointed out that there was no certainty a bid would be made.

RBC's James Hosie, meanwhile, speculated that one of the bidders could be fellow North Sea explorer Enquest, which dipped 0.6p to 126.2p on the mid-tier index.

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