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Questions around Capita's strategy after asset management shock
December 9, 2016 / 3:06 PM / 10 months ago

Questions around Capita's strategy after asset management shock

EDINBURGH (Reuters) - Shares in Capita fell for a second day on Friday after a profit warning and decision to sell its asset management business left analysts questioning the British outsourcing group’s strategy.

Capita, which offers IT-led administration services to help companies cut costs, announced the sale of its CAS asset management services arm on Thursday, one of its most lucrative units with a profit margin of around 25 percent.

Shares fell 1.1 percent to 479 pence having fallen by 14 pct on Thursday.

Analysts at Barclays expressed doubts about the company’s ability to keep step with an increasingly competitive, complex and risky industry at a time of belt-tightening.

Britain’s vote to leave the European Union has slowed the pace of decision-making by customers in the public and private sector, prompting analysts to look closer at the quality of Capita’s contracts and method of shoring up its balance sheet.

Barclays brokerage arm referred to a contract to manage London’s traffic congestion charge and a mortgage management contract at Co-op Bank, flagged as problematic by Capita in September.

“(..) are they genuine one-offs or do they point to a growing risk appetite which has reduced the margin for error?” it said in a note to clients. Barclays has an “equal weight” rating on Capita and a 525 pence price target.

CAS is worth at least 700 million pounds according to analysts, with one source familiar with the matter putting the price tag at up to 1 billion pounds.

Described by many as one of Capita’s “crown jewels”, the sale is aimed at paying off debt while revenues wane, with the Brexit vote throwing trade relations and labour supply into uncertainty.

The unit has a good portfolio of financial services clients and is attracting interest from private equity funds and some industry players, mainly outsourcing companies such as Tata Consultancy Services, the source familiar with the matter said.

A spokesman for Capita said Chief Executive Andy Parker had reiterated his confidence on Thursday that the strategy was the right one even as the shares fell on news of the planned sale.

Analysts at brokerage Stifel were sceptical.

“The outcome of the business review lacks substance and our confidence in the management team’s ability to turn round Capita is low. More decisive action is required,” they said, cutting their recommendation on the shares to “hold” from “buy” with a price target of 500 pence.

Other analysts noted a likely exit from Britain’s FTSE 100 index of leading shares after Capita’s 60 percent fall in value in the last year.

Additional reporting by Pamela Barbaglia in London; Editing by Keith Weir and Elaine Hardcastle

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