September 21, 2017 / 6:37 AM / a year ago

Leadership limbo and murky outlook drag down British outsourcer Capita

LONDON (Reuters) - Shares in Capita slumped 13 percent on Thursday after the British outsourcer reported weak first-half results, a murky outlook and no progress in its hunt for a chief executive.

Capita, which provides IT-based services for companies looking to cut costs, has issued a series of profit warnings following a slowdown in client decision-making after Brexit and problems with badly-run contracts.

On Thursday it said first-half underlying revenue declined 3 percent as it worked its way through difficult contracts and tried to simplify its business. It said it was confident of laying the groundwork for a new CEO, but some of its businesses were not performing as well as expected.

Shares in Capita, one of Britain’s biggest employers with more than 70,000 staff, have now fallen 42 percent over the past 12 months.

The group operates in over a dozen business sectors from health to retail to transport with services spanning call centres, TV licence management for the BBC, recruitment and technical certification.

Half of its more than 4 billion pound annual revenue comes from Britain’s public sector. But the leaden pace of business and political decision-making while the shape of Brexit is settled has shaken Capita as well as peers such as Mitie, G4S and Serco.

Capita said it was “pleased” with continuing efforts to find a new CEO to replace Andy Parker, who was at the helm for three years and left the company this month. But until the new head arrives, the company is effectively in strategy limbo.

“Capita is trying to become a simpler business, but there is work to be done and it’s clearly taking time,” said Neil Wilson, analyst at ETX Capital. “For example, early adoption of (new accounting standards) and restating last year’s revenues are designed to make comparisons easier. But if anything, the picture looks even muddier.”

Some analysts believe that simplifying the business and redirecting strategy will be so tough that the first task of the new boss will be to delay expectations of recovery.

The group has said it does not expect its business to recover until 2018, but some are less optimistic.

“I expect 2018 to be another transitional year but a lot depends on the CEO,” said Rory McKenzie, analyst at UBS, who has a neutral recommendation on the stock and a target price of 620 pence, versus its current price of around 568 pence.

“(Customers’) discretional spending will continue (to be) under pressure and big public contracts will keep getting pushed back,” he added. The British economy is growing at half its usual pace as it grapples with Brexit.

Capita said it expects pre-tax profit before significant new contracts and restructuring to rise modestly in the second half, compared to the first half of 2017. Analysts at Stifel said that implied a mid-single-digit cut to forecasts.

“A disappointing set of numbers in our view (is) likely to lead to some modest earnings downgrades,” Stifel said. UBS said that a lack of guidance on the outlook beyond 2017 may have spooked investors.

Additional reporting by Kate Holton and Paul Sandle; Editing by Susan Fenton

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