August 1, 2019 / 7:33 AM / 17 days ago

Capita turnaround plan on track as restructuring bears fruit

(Reuters) - Outsourcing group Capita (CPI.L) on Thursday showed how its restructuring efforts are starting to pay off as the company reported first-half results that included higher margins in some businesses, sending its shares as much as 22% higher.

Capita, which provides IT-led services for the public and private sector, also stuck to its full-year profit forecast.

Like a number of other UK outsourcers, Capita has been overhauling its business to control costs and pay down debt after years of acquisitions that made its complex structure unprofitable.

“Capita is now in the second year of a multi-year transformation and we remain on track to hit the targets we set in 2018,” said Jonathan Lewis, who was appointed CEO in 2017 to help to revamp the business.

The company said it was on track to achieve its 2020 target of double-digit operating margins, 175 million pounds ($211.89 million) in cost savings and at least 200 million pounds in annual free cash flow.

Margins rose in four out of its six main divisions in the first six months of 2019.

“The improvement in margins across the divisions was due to cost actions bearing fruit as well as lower losses from challenging contracts,” Goldman Sachs wrote in a note.

The group’s shares rose to a more than nine-month high at 142.15 pence by 1050 GMT.

Including Thursday’s gains, Capita stock has risen more than 23% this year, after shedding more than 80% of its value between 2016 and 2018.

Capita’s business services include recruiting staff for the British Army and providing customer services to FirstGroup (FGP.L) railways and retailer Marks & Spencer (MKS.L).

The company said Brexit was still affecting the volume of new policy initiatives by government departments, but could benefit private sector contractors in the long term.

For the six months ended June 30, adjusted pretax profit was 126.1 million pounds, a 3.6% drop from profit of 130.8 million pounds for the same period a year earlier.

Goldman Sachs had forecast a profit of 119.5 million pounds.

Revenue, on an adjusted basis, slipped 6.3% to 1.85 billion pounds and new orders dropped about 10% to 830 million pounds.

The company maintained its annual pretax profit forecast of 265 million pounds to 295 million pounds.

(GRAPHIC - Outsourcer Capita lags peers since 2016: tmsnrt.rs/2yvvhCx)

Reporting by Yadarisa Shabong in Bengaluru and Shashwat Awasthi; Editing by Anil D'Silva/Saumyadeb Chakrabarty/Jane Merriman

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