September 29, 2016 / 6:22 AM / a year ago

Britain's Capita feels Brexit chill as profits, shares take a hit

LONDON (Reuters) - Outsourcing group Capita (CPI.L) warned on Thursday that delays in decision making by customers after Britain’s vote to leave the European Union would hit its 2016 profit, wiping $2.3 billion (£1.77 billion) off its shares in their worst day of trading.

Capita, which provides services to banks, the national health service, retailers and utilities, said it was seeing weaker demand for IT products, recruitment services and reluctance from clients to sign off on major contracts.

Britain’s economy has held up better than expected since the June 23 vote but the problems at Capita show how uncertainty over Brexit is feeding through to investment decisions and is also having a knock-on impact on sales and profits.

It also highlights tougher competition in the outsourcing arena where two of Capita’ biggest rivals - G4S (GFS.L) and Serco (SRP.L) - are recovering from several years of problems related to the failure to deliver on some high-profile contracts.

Capita, the biggest outsourcer in Britain, has outperformed its rivals in the past few years but it is the second major outsourcing company to warn on profits in as many weeks after Mitie (MTO.L) cut its outlook.

“Revenue from major sales in the second half of the year is likely to be lower than expected due to continued delays in decision making,” Andy Parker, chief executive since 2014, told analysts.

“Also, we’re seeing a lower conversion of our pipeline. We are taking immediate action to reduce the cost base.”

Capita said in July that clients were taking longer to make decisions and on Thursday it gave more detail, saying fewer fund launches and flotations had hit its asset services division which manages share registers.

The group also said it had failed to introduce on time a new IT system for London’s congestion charge which it runs. It also said it was in contractual dispute with the Co-op Bank over the transformation of services that could lead to litigation.

The delay to the congestion charge had materialised since the company last reported in July, meaning it was unable to predict the hit to its sales.

Shares in the firm fell 29 percent following the unscheduled statement, its biggest one-day drop ever, and knocked the stock prices of rival groups.

“As seen at Mitie ... the UK outsourcing market is weak with low levels of contract awards and pressure on discretionary revenues,” analysts at UBS said in a note to clients.

Capita employs 75,000 staff in the United Kingdom, Europe, South Africa and India. It now expects underlying profit before tax to be in the range of 535 million pounds to 555 million pounds for the year to December 2016, compared to a consensus forecast of 614 million pounds.

It expects full-year organic revenue growth of about 1 percent net of attrition, down from a July forecast of around 4 percent organic growth.

Rival Mitie cut its profit forecast on Sept. 19 after customers delayed investments, meaning some large new contracts had not come through as expected.

Analysts at Shore Capital said they feared there could be more negative news to come, as client indecision following Brexit was likely to continue for several quarters, and that was not Capita’s only issue.

“We have also commented for some time over the sustainability of operating margins in an evolving environment with ever greater competition from more capable peers,” Shore’s Robin Speakman said in a note.

Reporting by Kate Holton; editing by David Clarke and Jane Merriman

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