UBS has cut its rating for Capita from 'buy' to 'neutral', saying that the outsourcing company's improved fundamentals are now priced in.

The shares, down over 2.0% on Wednesday, have jumped around 16% in 2013 so far.

The broker believes that Capita's full-year results on February 28th addressed the market's major concerns.

Organic growth improved to 6.0% in the second half, the first semester of positive growth in three years, and UBS believes that this will speed up to 8.0% in 2013. Also, the broker said that issues about a deterioration in working capital were addressed with an inflow in the second half and guidance for 100% free-cash-flow conversion in the "foreseeable future".

Furthermore, UBS thinks that 2013 will be a good year for Capita with 75% of the £5.2bn pipeline due for decision this year. Meanwhile, "improving market conditions and performance in transactional businesses like staffing and property bodes well for news flow and organic growth in the coming 12-18 months," the broker said.

However, UBS has longer-term concerns about falling margins, given the mix-shift in the private sector and ongoing public-sector pressures, as well as uncertainty ahead of the 2015 elections.

"We believe Capita needs to show its 100% focus on the UK (an established and competitive market) can deliver necessary long-term growth/returns."

The broker has raised its target price for the stock from 900p to 925p after making minor adjustments to its earnings per share estimates.

The shares were down 2.07% at 875p by 10:39 on Wednesday.

BC

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