September 7, 2017 / 6:55 AM / 10 months ago

UPDATE 2-Capita drops as accounting change cuts 2016 profit by a third

* 2016 operating profit cut to 335 mln stg vs 481 mln

* Capita opted for early switch to IFRS accounting standards

* Shares down 3.5 percent after tumbling to 3-month low (Adds company, analyst comments, shares, background)

By Elisabeth O’Leary

EDINBURGH, Sept 7 (Reuters) - British business services company Capita, looking for a new CEO after a series of profit warnings, slashed its 2016 earnings by almost a third on Thursday after adopting new accounting standards, sending its battered stock sharply lower.

The outsourcing company, in the middle of a major rethink after a Brexit-induced slowdown, opted to introduce obligatory accounting changes earlier than its rivals. The changes were not a sign of any problems in its contracts nor a correction of any errors, finance director Nick Greatorex said.

But the revisions to stated profit were bigger than expected, one analyst said, and might have a bearing on its dividend which has so far been protected despite weak profits.

“We are surprised by the magnitude of the balance sheet restatements,” said Shore Capital’s Robin Speakman. “We will assess in due course whether this has any implications for dividends.”

At 0810 GMT, Capita shares were down 3.5 percent at 621 pence, after touching a three-month low of 592.5 pence. The stock is down around 41 percent over the past year.

Capita restated its 2016 operating profit at 335 million pounds ($437 million), down from 481 million pounds previously and reported net liabilities of 553 million pounds versus assets of 483 million pounds originally.

The company said it was adopting International Financial Reporting Standards (IFRS 15) early as a “sensible” step, coinciding with a year of bad news. IFRS obliges it to recognise, measure and disclose revenue from long-term customers at a later date in the process than before.


“In 2016, due to the mix of maturity in our contracts in this particular year, this one time recalibration happens to result in a reduction in profit. This does not signal a change in the performance of our contracts, nor is it the correction of an error or a signal of problems which were not previously understood,” Greatorex told analysts on a webcast.

The new accounting method does not affect cash flow nor the profitability of contracts over their lifetime, Capita added.

The company has issued a spate of profit warnings which led to the resignation of its chief executive in March and has said it does not expect its profits to increase before 2018.

Capita’s problems emerged last year as clients delayed major deals in the wake of Britain’s vote to leave the European Union.

The company is trying to simplify its structure after years of acquisition-led growth and a structure which many analysts say has become difficult to manage.

Capita, which provides specialist business services to banks, retailers and utilities, also said it expected its first-half results, due to be published on Sept. 21, would be as anticipated in June.

Analysts expect the company to announce a new chief executive alongside first-half results.

Greatorex told Reuters in a phone interview the company was making “very good progress” on its CEO search but declined to say when an announcement would be made.

$1 = 0.7668 pounds Reporting by Elisabeth O'Leary; Editing by David Clarke and Mark Potter

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