By Tony Collins
Capita’s share price has fallen to a new 10-year low today (8 December 2016) after chief executive Andy Parker warned that “near-term headwinds” would hit trading performance in the first half of 2017.
The company’s share price of 513p at lunchtime today was 9% down on yesterday’s close. A year ago it was around 1200p.
It’s the lowest price since July 2006.
The “headwinds” warning may cause some customers, particularly officials and ruling councillors in some local councils, to wonder whether their arrangements with Capita for outsourcing “transformations” and future IT-related investments will be affected.
Capita announced today that it intends to dispose of the majority of the Capita Asset Services division and a small number of other businesses which no longer fit Capita s core business strategy.
It says these actions will consolidate Capita’ s position as the UK’ s leading provider of customer and business process management services, while underpinning the company’ s balance sheet.
Chief executive Andy Parker said: ” We are committed to delivering good returns to shareholders, supported by a strong capital structure and a clear growth strategy. In recent months, we have reviewed our management structure, operating model, business portfolio and our leverage to ensure we are in the strongest position to support future profitable growth.
” In November, we announced changes to our management and business structure and today we are announcing our intention to sell the majority of our Capita Asset Services division and a small number of other businesses.
“We have also commenced a programme of cost reduction and investments to position the Company strongly for renewed future growth. Together, these actions will create a leaner Capita, focused on its core strengths and with a much stronger balance sheet.
” I am confident that the markets Capita addresses offer long-term structural growth. We are however currently facing some near-term headwinds, which continue to make 2016 a challenging year and will affect trading performance in the first half of 2017.
“Our long-term contracts provide us with good revenue visibility across the year and the structural and cost reduction actions we are taking now will support progress in the second half of 2017 and into 2018. We therefore currently expect a similar trading performance to 2016 in the full-year 2017.”
Capita expects revenue to be around £4.8bn and underlying profit before tax to be “at least” £515m, excluding the cost of restructuring, for the full-year to December 2016.
The company had previously forecast underlying full-year pre-tax profits to be between £535m and £555m.
” Our new divisions are now fully aligned to the markets in which they operate and the divisional sales teams are working seamlessly with the central major sales team to better address these markets and fuel greater organic growth in 2018 and beyond.
” The decisive steps we have recently taken and those we are announcing today make us a more resilient business, committed to generating organic growth, maintaining and then growing our dividend and delivering sustained value for shareholders. ”
He added, “The headwinds we have faced in the second half of 2016 will affect trading performance in the first half of 2017.
” Our long-term contracts provide us with good revenue visibility across the year and the structural and cost reduction actions we are taking now will support progress in the second half of 2017 and into 2018.
” We therefore currently expect a similar trading performance to 2016 in the full-year 2017. Our average cost of debt in 2017 will continue to rise as a result of the rolling off of our interest rate swaps.”
Its pipeline of work remains well below what it was earlier in the year, at £3.8bn today compared with £5.1bn in July.
Capita has a number of problem contracts which have yet to be fully resolved.
The Telegraph quotes Parker as saying today that he had put a £50m programme of cost reductions in place in order to stem some of the losses.
The firm’s IT Enterprise Services division has been particularly weak in the last three months, leading the company to make “extensive” management and structural changes. It has reduced its 78,000 staff by almost 3% and moved some services to India.
Parker told Reuters, “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.”
Today’s lowered profit forecast follows a profits warning in September that full-year underlying pre-tax profits would be £535m to £555m for 2016, instead of a previously forecast £614m.
The Guardian quoted analysts at Barclays as saying,
“So another outsourcer bites the bullet in order to deliver.
“Is it just unfortunate coincidence that nearly all the big UK outsourcers have suffered the indignity of having their accounting policies scrutinised, a string of contract disputes or issues resulting in multiple profit warnings, or is there a systemic issue across the sector?
“The latter is a function of contract complexity and risk – both of which have increased over the years, at a time when competitive tension has increased forcing the major players to offer more for less. What is also very clear is that big is not beautiful in this market.
” Both Capita and Serco increased their scale and scope through aggressive M&A in order to access broader market opportunities in adjacent market areas away from their historical core. That strategy is now in reverse.
“Sadly for Capita, they are selling the wrong bit, in our view.”