Capita slumps on signs of difficult 2018

EDINBURGH (Reuters) - Shares in Capita hit a 12-year low on Thursday after the troubled British outsourcer cautioned that upcoming work was unlikely to boost profit in the short term, dashing hopes that 2018 would mark its recovery.

Capita, rebuilding after a series of profit warnings last year, said the market for major contracts remained “subdued” sending its shares down 13 percent and showing the scale of the job ahead for new chief executive Jonathan Lewis.

It also flagged difficulties in different business units, suggesting its prediction earlier this year that 2018 would mark a recovery may have been premature.

“The stated divisional performances described in the trading update reveal ongoing challenges across the group, but offset by cost reduction measures coming through,” said Robin Speakman, analyst at Shore Capital.

“With a challenging environment still evident for Capita, in our opinion, we stick with a “sell” stance”.

Capita, which operates primarily in Britain and is one of the nation’s biggest employers, issued a string of profit warnings in the second half of last year after it took on more work than it could profitably handle.

It stuck to 2017 guidance that underlying pretax profit, before significant new contracts and restructuring costs, would rise modestly in the second half of this year versus 195 million pounds in the first half.

“At first glance it looks as if there could be some pressures to full year 2018 profitability,” said brokerage Stifel in a note to clients.

Capita’s shares were down 12.5 percent to 407.60 pence at 0824 GMT. They are down 26 percent in the last six months, versus a flat performance for Britain’s main FTSE 100 share index.

Capita’s troubles came to the fore during a slowdown in business decision-making after Britain’s vote to leave the European Union in June 2016.

Its private sector partnerships division would be subject to “a higher level of contract and volume attrition which ... could impact upon the performance of the division in 2018,” it said. Capita’s public sector division had made “encouraging progress” but a defence contract would not recur next year, it added.

The IT services division had also improved thanks to cost-cutting but a one-off supplier settlement would impact profit this year, and its digital and software solutions division would suffer from the end of two major licences.

New CEO Lewis, who arrived at Capita this month to replace Andy Parker, said he aimed to “focus the business and allocation of capital and resources on the markets which offer the best growth prospects”.

The group would also work to improve its cost competitiveness further, recharge its sales performance and demonstrate its value to its customers, he said.

Reporting by Elisabeth O’Leary; Editing by Kate Holton and Mark Potter