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Capita warns on profit again as Brexit slowdown exposes flaws
December 8, 2016 / 7:51 AM / a year ago

Capita warns on profit again as Brexit slowdown exposes flaws

EDINBURGH (Reuters) - Outsourcing group Capita (CPI.L) announced the sale of its asset management services arm alongside a second profit warning in three months on Thursday, exposing flaws in its strategy made worse by the Brexit vote and sending its share price crashing.

The company, which provides IT-enabled business services to banks and investors, the national health service, retailers and utilities, also announced more cost-cutting plans and other asset sales to make its debt more manageable as earnings come under pressure.

Analysts said the sale of what many described as the company’s “crown jewel”, its lucrative Capita Asset Services business, suggested the company was struggling to raise cash to make up for lower than expected revenues on major contracts.

That in turn was a result of a slowdown in new orders coming through as new customers hesitate to commit in the wake of Britain’s vote to leave the European Union.

The company is under pressure to offer more services that differentiate it from competitors, but analysts criticised the management for what looked like a rushed change of strategy after the share price started to plunge in September.

“They clearly haven’t been repositioning to adapt to changes in the market,” said Rory McKenzie, analyst at UBS, who pointed to increased competition in the sector in recent years.

“The reliance on discretionary spend at both Capita and (rival) Mitie (MTO.L) has not just been huge, but a huge surprise,” he added. UBS has a neutral recommendation on Capita’s shares and a 675 pence target price.

The market value of Capita, already sliced in half since September’s profit-warning, fell another 12.9 percent to 3.3 billion pounds, with the shares at 490 pence.

Shares in rival Mitie, which has also complained of a slowdown in new business since the Brexit vote and issued two profit warnings since September, were down 2 percent at 211 pence.

Capita now expects to make an underlying profit before tax in 2016 of at least 515 million pounds, down from its reduced forecast in September of 535-555 million pounds.

The company itself pointed to its IT services and the structure of the business units, which it is now in the process of simplifying, as weak spots.

Beyond that, details on problem spots provided by the company were few and analysts questioned the sale of the CAS unit, which provides 60 million pounds of annual operating profit.

“We see the disposals as a reaction to the balance sheet position rather than having any clear strategic logic,” said Andrew Brooke at RBC, who had forecast more trouble for Capita following the last earnings downgrade. He has a target price of 564 pence and a “sector perform” recommendation.

Capita said its net debt to core earnings ratio would fall to under 2.5 times by the time asset sales are completed in roughly a year’s time, compared with an expected level of 2.9 times at end-March. Currently the net debt to EBITDA ratio stands at 2.5.

In the meantime, the trading outlook seems uncertain.

    “Colour on cost-cutting has been scant at best and they haven’t offered anything to make me think there is any recovery potential. No-one knows what Brexit means yet and their clients don’t know either, so potentially it’s a vicious circle,” Mike van Dulken, head of research at Accendo Markets, said.

    Capita identified problems at its IT services division.

    “There’s been a fallaway in what we would call discretionary spend, like training and (providing) employee benefits. People are delaying making decisions on implementing technology, so there is a whole host of things going on,” Chief Executive Andy Parker told Reuters.

    The September downgrade had already alarmed investors, bringing into doubt whether its dividend payout would be maintained and the possibility of a capital hike. Mitie has also issued two profit warnings in as many months.

    In a measure of the grim business outlook, the bid pipeline for new contracts now stands at 3.8 billion pounds, down 25 percent since July. In comparison, Capita’s reported revenue last year totalled 4.7 billion pounds.

    Parker said he was “absolutely” confident that the company’s actions would allay the need to raise capital or cut the company’s dividend.

    “We’re expecting next year to be very much a transitional year, with similar trading ... moving to sustainable growth in 2018,” Parker told Reuters.

    Capita is predominantly UK-based, unlike bigger rivals such as G4S (GFS.L) and Serco SRL.L that have been sheltered to a large degree from Brexit-related fallout by their bigger geographical footprint.

    With additional reporting by Kate Holton Editing by Tom Pfeiffer and Greg Mahlich

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