UPDATE 1-Capita profit rise eclipsed by margin worries

Thu Jul 25, 2013 4:52am EDT

* First-half pretax profit up 10 pct to 205 mln stg

* Operating margin down 0.8 point at 12.5 percent

* Shares fall 2.9 percent

By Sarah Young

LONDON, July 25 (Reuters) - Profit margins at Britain's biggest outsourcing company Capita slipped more than expected in the first half, pushing down its shares, even as it posted a 10 percent rise in earnings.

The group, whose contracts range from managing over 21 million life and pension policies to providing radios for Britain's emergency services, said the underlying operating margin fell 0.8 percentage point in the six months to June 30 to 12.5 percent, reflecting implementation costs of big new contracts.

The stock, which has climbed over 30 percent so far this year and touched an all-time high earlier in July, fell 2.9 percent to 1,006 pence on Thursday, putting it among Britain's biggest blue-chip decliners.

"Our fear is that this trend of margin attrition continues," Shore Capital analyst Robin Speakman said. "If it continues at this rate, the reality is that our forecasts are too high at least in terms of profitability."

Shore Capital had forecast that the operating margin would be 0.5 percent lower, as had Panmure Gordon and JP Morgan.

Capita, which gets around half of its revenue from the public sector, posted pretax profit of 205.2 million pounds ($315.12 million) for the first half compared to the 186.4 million in the same period last year and said it was confident with regard to the full-year, having won a record 2 billion pounds worth of contracts in the period.

Paul Pindar, Capita's chief executive, said in an interview that the half-year margin was in line with the company's expectation of between 12.5 percent and 13.5 percent for 2013 and beyond.

"We would expect our full-year margin to be better than our interim margins. The second half will see a far higher rate of organic growth because we've got a number of contracts that are now starting or started where we've borne the implementation costs in the first half," he said.

Capita upgraded its 2013 organic growth forecast in May to at least 8 percent after a series of contract wins including a 1.2 billion pound deal with Telefonica's O2. It reiterated that growth guidance on Thursday.

Some of the company's other big contract wins in the first half of the year were with parts of government - the Cabinet Office and the London Borough of Barnet.

Pindar said the pipeline for government business continued to be strong, dismissing worries about the impact of a government review of contracts held by rival outsourcing companies G4S and Serco following a fiasco over the tagging of criminals.

The British government has also recently stepped up rhetoric against its biggest contractors and said it wants to hand more work to smaller firms.

"Activity coming from government is pretty healthy... The market at the moment is in a pretty healthy place. It's certainly far more healthy than it was two years ago," he said.

Capita raised its interim dividend by 10 percent to 8.7 pence.