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Woodford: I won't compound error by selling Capita

Neil Woodford admits Capita has been a 'poor investment' but says selling now would be 'almost impossible to justify'.

Woodford: I won't compound error by selling Capita

Neil Woodford has admitted Capita (CPI) has proved a 'poor investment' for his funds but said he would not be 'compunding the previous error' by selling the embattled outsourcer.

Shares in Capita have halved in value since the company last week announced a rights issue, suspended its dividend and said it would sell assets to plug its pension deficit, as it delivered another profits warning.

It was the latest in a string of warnings from the outsourcing group, whose shares are down 84% over the last two years.

Woodford is among the biggest backers of the company, with 0.8% of his £8.3 billion Woodford Equity Income fund held in the stock prior to last week's fall, and 1.3% of his smaller Income Focus fund.

In an update to investors, Woodford acknowledged the impact on his funds' performance, but said it would be a mistake to sell the stock now.

'I am not trying to make a silk purse out of a sow’s ear – this has been a poor investment, but it is one that has the capacity to become a significantly better one from here,' he said.

'The mistake I have made, albeit I didn’t know it at the time, was in owning Capita in 2016. It is not a mistake to own it now. And so, I will not be compounding the previous error by behaving in an irrational and valuation insensitive way now.'

He said the heavy fall in the share price 'from an already depressed level' on last week's news was unsurprising given current market conditions.

'After all, Capita represents many of the things that this market loathes at the moment – it is exposed to the UK economy, it has a recent record of disappointment, it is an outsourcer,' he said.

'This is the reality of what we have been writing about for some time now. Markets are being driven by momentum. Valuation is irrelevant – it simply does not matter in the stock market at the moment.'

He pointed to the company's standing in 2016, when having made a profit of £475 million, its shares were worth £12. Now, with profits likely to come in between £275 million and £300 million, its shares are trading hands at 174p.

'A decision to sell Capita here is almost impossible to justify from a fundamentally-based perspective,' he said.

Woodford also voiced his support for new Capita chief executive Jonathan Lewis's plans to turn around the business.

'This is a complete reset for Capita,' he said. I would go as far as to say that the business will be in better shape at the end of 2018 than it was in 2016. It will have infinitely better leadership, a stronger balance sheet, better cash flow, more conservative accounting policies and a lower pension deficit.'

Capita's woes have contributed to a tough year for Woodford, whose flagship Equity Income fund has lost 2.3% over the last 12 months and is the only fund in the Investment Association's UK Equity Income sector to have failed to deliver a positive return over that period.

The manager said that while the stock market was 'totally preoccupied with momentum and insensitive to valuation', he expected the environment 'to remain as challenging for the Woodford funds as it has been since early summer last year'.

'Equally, however, we should expect rationality to return in an unpredictable way, as it has done always in the past,' he added.

'In the meantime, I would be doing you, my investors, a massive injustice if I was to abandon the investment discipline that has guided me for 30 years in this industry.'

3 comments so far. Why not have your say?

Bob C urry

Feb 05, 2018 at 17:18

A pal said he was thinking of buying some Crapita as a recovery stock. I had a look at the report and accounts, interesting reading. Big turnover on the board. But two fascinating items. Like Carillion most of the assets is goodwill. There is a big section on impairment using the CAPM on various CGUs, bullshit baffles brains. The net outcome is an impairment charge of just 3%!

Also, they are in danger of breaching bank covenants. They have a big section on Alternative Measures of Performance. If you don't like these figures, we have some better ones! They then use their 'Adjusted' figures to calculate debt ratios, and say they don't breach covenant limits. The auditors KP Nuts look at their calculations and approve them! Surely, bankers must specify the way covenant ratios are calculated? Don't buy.

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Raj K

Feb 05, 2018 at 18:30

A star fund manager that has 126 Holdings in his fund. How does his team have enough time to keep on top of all of them. Doesn't strike me as a manager with conviction!

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Mark Yu

Feb 11, 2018 at 10:24

Conviction alright,just on wrong ones, like cpi, pfg, imb, aa, drx,utw etc etc.

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