Capita’s contract extension contract with Zurich has been labelled “a disappointment” by a specialist RPO analyst.

Yesterday, Capita announced it was extending its service provision to this important client in financial services and insurance out to 2026 in the UK and now incorporating Zurich’s continental European operations from July 2011.

In a note to institutions, Robin Speakman, support services analyst, says: “The total additional revenues under the extension amounts to c£570m, although this only equates to additional annual revenues from FY2012 of some £20m in our view.

“We had expected a figure closer to c£50m per annum, extending operations with Zurich to the Continent, adding a purpose built infrastructure in Poland to service this and other emerging European clients.

“It seems to us that the value of the 15-year additional contract with Zurich is some £270m or c£18m per annum. We also expect that margins, especially post set-up costs, are likely to be on a lower level than seen previously due to tighter client margin expectations; we believe that the renewal element of the contract is also likely to see margin pressure as is usually the case on contract renewals.

“Beyond the headline of £570m in revenues, this announcement is a disappointment; the magnitude of additional revenues is insufficient to move our forecast expectations for the current year or for FY2012F. Indeed, we continue to see downward pressure on forecasts with organic development still under strain.

“We do expect organic revenue growth to return, but for this to remain negative in all likelihood for the first half to June 2011; Capita guiding to a stronger H2 performance – this comes after a negative organic performance of c5% last year.

“However, whilst we welcome a return to positive organic development in the coming quarters, we still expect this to be accompanied by new business strain – pulling through a lower EBITA (earnings before interest, taxes, and amortisation) margin and a requirement for higher working capital and growth investment.

“We retain a view that pressure on forecasts for FY2012 (in particular a return to double-digit organic growth) is evident and reiterate our sell recommendation.”