August 1, 2018 / 6:27 AM / 14 days ago

UPDATE 2-Profit fall underlines Capita challenge, shares sink

* 60 pct fall in profit before tax to 80.5 mln pounds

* Forecasts organic growth to be weaker in the second half

* Underlying pre-tax profit f’cast cut to 250-275 mln pounds

* Shares drop by more than 6 pct following results (Releads with details, CEO comments)

By Elisabeth O’Leary

EDINBURGH, Aug 1 (Reuters) - Capita’s shares fell by more than 6 percent on Wednesday after it reported a 60 percent drop in first half pre-tax profit, underlining the huge challenge facing the British outsourcing firm’s new chief executive Jon Lewis.

With IT-based business services for the public and private sectors ranging from managing London’s congestion charge to paying National Health Service dentists, Capita has been hit by a slowdown in British business and tighter corporate budgeting.

“Clients are very thoughtful about their investment decisions and the sales cycle is taking a little longer,” Lewis, who is trying to simplify Capita’s unwieldy structure, told Reuters in a telephone interview after the results.

Capita, which raised 700 million pounds from investors earlier this year, also said 2018 underlying pre-tax profit would now be between 250-275 million pounds ($360 million), less than the 270-300 million pounds it predicted earlier this year.

This reflected an adjustment for the sale of businesses which had contributed around 25 million pounds, Capita said.

Shares in Capita were down 6.6 percent to 151 pence at 0856 GMT. They have gained sharply since April, but are still down 65 percent year-on-year.

WEAKER H2 GROWTH

Capita repeated its long term forecast of a return to growth in 2020 after reporting a 60 percent decline in profit before tax in the first half to 80.5 million pounds. It also forecast organic growth would be weaker in the second half of 2018.

Lewis said profit had partly been sapped by long-delayed investment in new technology, although he was “encouraged” by the customer reception to Capita’s progress and around 1 billion pounds in new orders in the first half.

Capita’s order book stood at 7.7 billion pounds at June 2018 compared to 8.2 billion pounds at the end of 2017, which it said reflected low levels of bid activity in 2017 and delays in decisions by its customers.

“We remain cautious regarding Capita’s recovery profile because, after an initial period of euphoria, outsourcers have taken longer than expected to extract savings and past reputational/performance/financial issues have weighed on revenue attrition,” analysts at brokerage Jefferies said, adding that “revenue momentum feels softer”.

Lewis wants to simplify Capita’s structure and make it more cohesive after years of acquisitions turned it into a sprawling mass of separate service providers.

Disposals are ahead of expectations, and Capita said it would now make 416 million pounds from asset sales this year, over 100 million pounds more than originally anticipated. Most of the proceeds will be used to pay down debt. ($1 = 0.7634 pounds) (Reporting by Elisabeth O’Leary; editing by Kate Holton and Alexander Smith)

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