Capita: Strong underlying progress overshadowed by Civil Service Pension Scheme challenges

Capita is an AI-enabled business services partner and is listed on the premium segment of the London Stock Exchange. The company is a constituent of the FTSE All Share index and has a market capitalisation of £330m.

Half year results to 30 June were published on 4 August and we were delighted to welcome CEO Adolfo Hernandez and CFO Pablo Andres, to a Yellowstone webinar to talk about these results and the strategy and outlook for the rest of 2026 and beyond.  

The first half has been one where management have delivered significant progress, with revenue growth, strong contract wins and further improvements to the cost base.  However, It has undoubtedly been a tough period, with newsflow dominated by the operational problems at the Civil Service Pension Scheme (CSPS).

Public Services continues to perform strongly, with revenue growth of 2.4% and its highest level of H1 contract wins since 2021. Operating margins remained around 8%, despite the allocation of additional central overheads following the deterioration in Pension Solutions profitability. Excluding these accounting reallocations, margins would have been 8.4%. Operational KPIs remain above 90%, while management expects strong cash conversion by year end.

Pension Solutions has inevitably been impacted by CSPS. The contract reduced first-half profit by £14m directly, with a further c.£3m collateral impact as resources elsewhere were redirected to support it. Despite this, divisional revenue grew 24.7%, with management estimating underlying growth excluding CSPS at 5–10%. The wider pensions operation continues to perform well, serving around seven million scheme members and achieving 94% of its operational KPIs (excluding CSPS).

Resolving CSPS is clearly management’s number one operational priority. Capita has moved from dealing with urgent cases towards a position where it has sufficient capacity to process more cases than it receives and progressively reduce the backlog. However, the financial impact remains significant. Management reiterated its July guidance that CSPS would result in an additional £25–40m P&L impact, with £35–50m of free cash flow impact.

Importantly, contract momentum elsewhere remains strong. Total contract value won in H1 was £1bn, the highest level since 2021 and the unweighted pipeline continues to grow. Public Services recorded its strongest first half for wins in several years and subsequently secured the £425m TfL contract in July. Pension Solutions has also achieved an exceptionally high win rate of around 99%.

There is inevitably a lag before these wins appear in the P&L. Of contracts won, around 11% of associated revenue is expected in H2 2026, 14% in 2027, 21% in 2028 and the balance thereafter. However, revenue visibility is high: approximately 76% of H1 revenue was already in the order book, with another c.10% coming from recurring framework agreements.

The transformation programme also continues. Having delivered £250m of cost reductions, the disposal of Contact Centres has created scope for another £40m of efficiencies, of which £8m has already been achieved. Capita is now a simpler and more focused business, which management believes should generate greater operational leverage, facilitate technology sharing and ultimately make a more valuable company.

AI remains central to the strategy. Capita has moved from experimentation towards adoption and now has close to 500 AI use cases progressing through its organisation. Management sees the future of outsourcing as combining people, processes, data and AI agents, rather than simply replacing employees with technology. Capita’s opportunity is to use its longstanding expertise in complex public-sector and regulated processes to orchestrate these technologies for customers.

For 2026, revenue is expected to be broadly flat, with operating margins reducing reflecting the additional costs of the CSPS remediation work. Looking further ahead, Pablo provided some useful maths around the potential cash-generating capacity of the business. Annualising first-half EBITDA, adjusting for CSPS and adding half of the targeted £40m additional savings produces illustrative EBITDA of around £180m. Applying 80–85% conversion and deducting capex, interest and leases resulted in approximately £57m of free cash flow before business exits. While explicitly not a forecast, it provides a useful indication of what the underlying business could generate as exceptional items disappear.

So where does that leave Capita? CSPS has clearly been a major setback, both financially and reputationally, and management acknowledges there is still significant work to do. But it is also increasingly an exception within a business where the majority of operations are performing well. Contract wins are accelerating, the cost base continues to fall and the Contact Centres problem has now been removed.

If management can resolve CSPS and translate the improving underlying business into sustainable free cash flow, Capita should emerge as a considerably simpler and stronger company. The route has certainly been bumpier than shareholders would have hoped, but the potential upside remains significant if the operational progress finally starts to become visible in cash generation.

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