Capita PLC (LON:CPI) said on Monday it plans to raise £701mln through a rights issue and unveiled a wider full year loss.
The fully underwritten rights issue of more than one billion new shares will be priced at 70p per share, representing a discount of about 56.2% to the group's closing price last Friday.
In January, the outsourcing company revealed plans to raise £700mln from shareholders later this year as it warned on 2018 profits and scrapped its dividend.
READ: Capita shares plunge as it warns on profits and announces £700mln rights issue
Capita said in a statement on Monday that proceeds from the rights issue would be used to pay down debt, execute its strategy and invest in the business. Net debt at the end of 2017 stood at £1.1bn.
Shares rose 11.2% to 177p in morning trading.
“Key to the share price advance is investor relief that a £701m rights issue is fully underwritten, meaning various investment banks have guaranteed to take any of the new stock unwanted by shareholders, so there isn’t any doubt that it won’t raise all the desired money," said Russ Mould, investment director at AJ Bell.
“The new cash should help remove financial pressures on the company’s balance sheet and allow management to focus on finding ways to revive Capita’s fortunes. However, the business will still be under pressure to show positive results fairly quickly if it is to keep investors on side."
The strategy under new chief executive Jonathan Lewis is to simplify the company by selling off divisions and focusing on core areas.
The group expects proceeds of about £300mln from the disposal of non-core units in 2018. It made £445.4mln on the sale of Capita Asset Services businesses.
Annual losses steepen, revenues fall
In 2017, Capita made a pre-tax loss of £514.1mln compared to a £89.8mln loss the previous year, mainly due to a £551.6mln goodwill impairment resulting from the termination of contracts, a deterioration in new business opportunities and its transformation costs, the company said in a separate statement releasing its results.
"Only last week the company renewed its contract with the BBC to collect the licence fee so while this week’s loss doesn’t make for pleasant reading, today’s announcement does appear to suggest that management have a turnaround plan that might work, and the confidence of shareholders in pulling it off," said Michael Hewson, chief market analyst at CMC Markets.
READ: Capita receives welcome boost as it wins contract extension with BBC
Underlying pre-tax profit rose 43% to £383mln from £268.5mln on the back of contracts with The Co-operative Bank, Transport for London, Defence Infrastructure Organisation, the Department for Work and Pensions and the Data and Communications Company.
Revenue fell 3.1% on a reported basis to £4.2bn from £4.3bn while underlying revenue dropped 4.3% to £4.1bn from £4.3bn, reflecting declines in the public services partnerships, professional services, and digital and software services businesses.
Underlying like-for-like revenue, excluding results from discontinued operations, decreased 0.6%.
Cash flow and cost savings targets
Free cash flow plunged to £37.7mln from £367.3mln on a reported basis, in part due to a low level of new business signed in 2016 and 2017.
The company did not recommend a final dividend and said it would resume payouts once it generates "sufficient sustainable" free cash flow.
Capita is targeting post-tax free cash flow of at least £200mln in 2020. It is also aiming towards annualised cost savings of £175mln by the end of 2020.
Capita said it continues to expect underlying pre-tax profits in 2018 of £270mln to £300mln as trading in the first quarter met estimates.