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Capita taking right steps to recovery but UK political turmoil weighs, say analysts

Last updated: 15:05 01 Feb 2018 GMT, First published: 10:05 01 Feb 2018 GMT

Capita
Capita warned on profits and announced a £700mln rights issue on Wednesday

Capita PLC (LON:CPI) could be an “interesting recovery story” but it is too early to tell whether the new chief executive’s turnaround plan will bear fruit, according to analysts at Jefferies.

The outsourcing firm, which holds several contracts with the government, on Wednesday issued a profit warning and announced plans for a £700mln rights issue, to scrap its dividend and sell off non-core divisions.

READ: Capita shares plunge as it warns on profits and announces £700mln rights issue

The news sparked worries that it could face the same fate as collapsed contractor Carillion PLC (LON:CLLN).

Jonathan Lewis, who started as Capita’s chief executive two months ago, admitted that the company was “too complex” and “too widely spread across multiple markets and services”, making it challenging to maintain a competitive advantage in every business. 

“Capita could be an interesting recovery story but it is too opaque to model with conviction, management guidance has been unreliable, and perpetual UK political turmoil continues to weigh on the revenue outlook,” said Jefferies.

Jefferies downgrades Capita to 'hold'

The broker cut its rating on the stock to ‘hold’ from ‘buy’ and slashed its target price to 200p from 750p.

Capita now expects 2018 underlying pre-tax profits to be lower at around £270mln to £300mln, well below consensus forecasts of £380mln, due to contract delays, higher attrition, weak new sales and higher costs.

Revenue is expected to be flat compared to the previous year, which is ahead of consensus forecasts for a 204% decline.

“The new CEO may have kitchen-sinked expectations and front-end loaded investment costs but it’s difficult to prove at this juncture,” Jefferies said.

CEO on the right track 

The view of RBC Capital Markets is that Lewis is “doing all the right things” but weaker trading and the “more precarious” balance sheet mean he has had to raise capital before completing a full strategic review.

RBC left its rating at ‘sector perform’ but cut its target price to 185p from 500p.

Capita plans to use the proceeds of asset disposals to pay down net debt, which stands at £1.15bn.

But RBC said 2018 is going to be hit by lower EBITDA and £215mln spend on one-off items, including a £66mln settlement with the Financial Conduct Authority for failing to meet regulatory requirements with its Connaught fund as well as £130mln to unwind working capital and £130mln cash outflow on deferred income due to a lower level of new business.

“Even with the dividend cut, net debt would be up to £1.5bn, implying gearing of over 3.5x pre the pension,” RBC said.

Risk of continued market weakness 

RBC noted that management is trying to reduce cut costs through the suspension of the dividend, a rights issue and disposals.

“Whilst cost savings going forward should be a positive, there is the risk of continued market weakness, given Brexit and the UK political environment and rebid risk is also on the horizon,” it said.

After yesterday's 40% plunge, Capita shares were down another 14% in afternoon trading on Thursday at 156.65p.

 -- Updates share price -- 

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