Capita shares rise as public sector business shows strong growth

Capita plc shares rose 2.6% after the outsourcing firm reported mixed first-half 2025 results, with adjusted revenue of £1,154.8 million broadly meeting expectations but adjusted operating profit of £42.6 million significantly beating estimates despite a year-on-year decline. Strong performance in its Public Sector division, which grew 4% and saw contract wins increase by 17% to £1,044.4 million, offset a 20% revenue decline in its Contact Center business. Capita maintained its full-year outlook for flat adjusted revenue, upgraded its Public Sector guidance, and remains on track for £250 million in cost savings by year-end 2025, expecting to be free cash flow positive from the end of 2025.

Analysis

Capita plc's first-half 2025 results illustrate a company undergoing a significant strategic transformation, characterized by a stark divergence in divisional performance. While group adjusted revenue declined 4% to £1,154.8 million, broadly meeting expectations, adjusted operating profit of £42.6 million substantially beat consensus forecasts despite a 22% year-on-year drop. This profit outperformance, driven by cost discipline, was a key factor in the 2.6% share price increase. The core of the company's current strength lies in its Public Sector division, which constitutes 62% of revenue and grew 4%, effectively offsetting a severe 20% revenue contraction in the Contact Center business stemming from previously announced contract losses. Forward-looking indicators show positive momentum, with total contract wins increasing 17% and the book-to-bill ratio improving from 0.7x to 0.9x. Although still below the 1.0x replacement level, this trend suggests a strengthening pipeline. Management maintained its full-year outlook for flat adjusted revenue and reaffirmed its target to be free cash flow positive from the end of 2025, signaling confidence in its cost-saving programs and the ongoing pivot towards higher-growth public sector and technology-enabled contracts.

Key Decisions for Investors

• The primary investment thesis rests on whether the Public Sector's 4% growth and 17% increase in contract wins can consistently outpace the guided mid-teen revenue decline in the Contact Center business; monitor the book-to-bill ratio for a sustained break above 1.0x as a key validation point.
• Given the significant beat on operating profit against a backdrop of declining revenue, investors should focus on the execution of the £250 million cost-saving plan and the company's ability to achieve its stated goal of positive free cash flow by the end of 2025 as a critical test of the turnaround's financial viability.
• The market's positive reaction to these mixed results suggests an appetite for the transformation story; however, investors should remain cautious, as the maintained full-year guidance for flat revenue implies the company's successful pivot is already partially priced in and hinges on flawless execution for the remainder of the year.