Capita unveils new strategy and rights issue as write-downs hit profits

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Sharecast News | 23 Apr, 2018

Updated : 15:36

Capita has confirmed plans for a £701m rights issue to enable it to carry out a new strategy after a "significant deterioration" in new business wins and business volumes that will continue to weigh on profits in 2018.

Having warned in January of the significant negative impact on underlying profits from contract and volume attrition, the FTSE 250 outsourcing company reported a £513m loss before tax for calendar 2017 but said underlying profit before tax increased 43% to £383m. Net debt was trimmed to £1.1bn from £1.8bn.

As market conditions have not eased, while some costs have increased, including depreciation and adoption of new General Data Protection Regulation, Capita said it was not likely to be able to offset this through cost cutting and new business wins, meaning underlying PBT is likely to fall 22-30% to £270-300m for calendar 2018.

Last year's loss chiefly stemmed from a £551.6m write-down to goodwill in the face of the "continued operational and external challenges" that have led to the sharp decline in new business opportunities from earlier positions, contract terminations and volume attrition, particularly in the Private Sector Partnerships division.

Since January's profit warning, which came not long after the collapse of fellow government outsourcer Carillion, Capita has announced plans to sell off £300m of non-core businesses over the course of 2018 and on Monday launched its new strategy to "to simplify and strengthen the business".

The group has been reorganised around five core markets: software, HR, customer management, government services and IT services, plus a sixth division, specialist services, which includes those businesses which either are not seen as growth markets, have little in common with other divisions or are at an early phase in their development.

With the 70p-a-share rights issue a "key component" of the plan, chief executive Jon Lewis said the chief target is to "simplify Capita by focusing on growth markets and to improve our cost competitiveness" and to strengthen by investing up to £500m in infrastructure, technology and people over the next three years.

The transformation programme will use £220m of the £662m net proceeds of the rights issue will generate, of which £150m is earmarked to achieve an "annualised cost competitiveness saving" of £175m, while £157m is needed for agreed pre-payments and make-whole payments for a chunk of US bonds, with the £285m balance of proceeds will be used to support Capita's investment programme.

"There is a lot to do, but I am confident that the plan is clear and prudent. Capita will become more predictable, have stronger operational discipline and consistently delight its clients."

He expects to deliver annualised cost savings of £175m, double-digit margins and at least £200m of sustainable free cash flow in 2020.

Capita shares were up more than 12% by midday on Monday, having fallen more than 55% since January's warning.

"Overall we view the reiteration of guidance for 2018 and the lack of incremental negative news as a mild positive," said analysts at Goldman Sachs, also liking that the five-year strategy streamlining of the businesses and focus on maximising risk/returns.

"One concern could be on government services, which has driven a few negative surprises in the past and where there are still a couple of contracts under pressure. Failure to turn these around could pose a risk medium term, in our view. On new contracts we believe a consistent focus on risk/returns should help the company avoid future issues in this space."

While the details of the strategy plan and the reiteration of guidance were seen as welcome news, it was acknowledged that there was a lot resting on performance and management execution in 2018 and 2019 "in order to drive further re-rating in the shares".

Shore Capital's Robin Speakman says a theoretical ex rights price (TERP) of 106p emerges, though he said relief of the transaction being completed was balanced by a potential overhang of stock from investors concerned over what he saw as a likely slow recovery of the group.

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