Capita with Charts

The Investment Column: Pioneering Capita is expensive but a good bet for the long term

When Rod Aldridge started his career in the post room of East Sussex County Council in the 1960s and began training as an accountant, he seemed destined to ascend the greasy pole of local government administration. But during a stint at the Chartered Institute of Public Finance and Accountancy, the public-sector accountants' body, he helped develop software to help local authorities organise their employees, and the resulting consultancy work formed the basis of the company that was to become Capita.

The business has grown by taking over administrative functions from local and central government and, latterly, private businesses. Capita collects your television licence, pays teachers' pensions, perhaps sends out your council tax bill, looks after criminal records and may well deal with your insurance claim. It also collects London's congestion charge.
And yesterday it was the best performer in the FTSE 100 on news that, so far this year, it has signed major contracts worth £843m in total. Half of that comes from Birmingham City Council, which is using Capita to plan a new software system to improve efficiency. As the work with Birmingham progresses, you can be sure Capita will find other services it can provide for the council.

The philosophy is that Capita and the outsourcer share the cost savings from working together. The company has still barely scratched the surface of what might be won from local and central government, particularly as the more difficult public finances push efficiency planning up the agenda.

In the private sector, expect Capita to win a big contract to look after Zurich's life insurance policies. And all the while, Capita is winning run-of-the-mill contracts to administer employee share-save schemes and other minor administrative tasks. The more work it puts through its giant call centres and business processing centres, the more profitable they are.

It is a virtuous circle, and Capita is a pioneer and market leader. Investors who want to own a slice will need to pay up, since the shares trade on more than 20 times earnings, but it is worth having for the long-term.