Capita shares plunge 35% as turnaround drags on

(Reuters) - British outsourcer Capita CPI.L shed more than a third of its market value on Thursday after saying it would have to spend an additional 170 million pounds to rebuild its business, hitting its 2020 cash forecast and debt pile.

FILE PHOTO: An illuminated sign is seen in Capita offices in London, Britain, January 31, 2018. REUTERS/Toby Melville

The company also said it was exploring selling off non-core assets, the latest move by one of Britain’s big service providers to shore up its finances.

Britain’s outsourcing industry has been hit by a wave of cutbacks following rapid expansion. One of the world’s biggest, it employs hundreds of thousands of people to clean offices, provide IT and HR services and maintain nuclear submarines.

Chief Executive Jon Lewis said transforming a company the size of Capita would take time but they were rebuilding trust with customers, improving margins and moving up the value chain in the outsourcing industry.

Shares in the 36-year-old company gained steadily during 2019 after Lewis launched a rights issue to rid it of risky contracts and invest in its services. But investors took fright on Thursday when it became apparent that any gains were still some way off, wiping 760 million pounds off its market value.

“The market reaction is an overreaction, quite frankly,” Lewis told Reuters when the shares were down around 15%. “(The transformation) is a bit harder and it’s going to last a little bit longer.”

Lewis said in 2018 his turnaround plan would cost 720 million pounds over three years. The company said on Thursday that would now be around 890 million pounds.

Analysts at Numis said they expected further exceptional costs as the turnaround proves more protracted than expected, but that the lowered guidance remained within their forecasts.

Capita reported a 2019 loss of 62.6 million pounds while its adjusted net debt rose to 791 million pounds from 466 million pounds a year earlier. The unadjusted number was much higher, at 1.35 billion pounds.

Revenue continued to slide, down 4% to 3.6 billion pounds, but at a slower pace than previously. Analysts said the underlying performance, when stripping out one-off costs, was in line with expectations but debt was higher and profit growth likely pushed back.

The company spent just shy of 160 million pounds on restructuring in 2019, including 26 million on professional fees, and took a 41 million pound goodwill impairment.

Michael Hewson at CMC markets said investors may have decided the timeline to recovery was too long to hold the stock. For an industry already operating on thin margins, any global downturn could make recovery even harder.

“With the economic uncertainty coming down the pipe, it’s going to limit their room for manoeuvre,” he said. If it’s already cost them more now, how much is it going to cost them going forward?”

Capita’s stock was down 35% at a two-year low of 82 pence. It hit a high of 815 pence in 2015.

Most outsourcers have been forced to cut costs and shrink operations after they grew through the economic downturn by securing contracts at wafer-thin margins, leading to sprawling groups that were unable to counter the slowdown sparked by Britain’s decision to leave the European Union.

Outsourcer Carillion collapsed in early 2018, while Interserve was taken over by its lenders.

Lewis said he was investing heavily to take Capita from a portfolio of around 250 independently-run businesses to an integrated company providing consultancy and digital services.

He said since January 2018 the average margin on its contracts has been 10%, but prior to that many contracts ended up with a negative margin as the company had to invest more to provide services than originally factored in.

Reporting by Patrick Graham; Editing by Bernard Orr, Jan Harvey, Kirsten Donovan