Capita PLC (LON:CPI) swung to a first-half loss and warned that the slow return to growth means it will not generate sustainable cash flow for up to two years.
The outsourcer reported a loss before tax of £28.5mln for the first six months of the year from a £31.2mln profit last time.
Profits went up in flames as adjusted revenue shrank 9% to £1.7bn and the company blamed its shift to lower-margin business, the impact of COVID-19 and a £42.6mln hit for untaken holiday.
The latter non-cash charge was “as a result of high levels of untaken holiday for our 60,000 colleagues” but is expected to reduce significantly in the second half.
Chief executive Jon Lewis said, “this crisis has come in a pivotal year for Capita when we had expectations of beginning to generate revenue growth and sustainable cash flow.
“Instead, we have had to focus on managing our way through the crisis, while accelerating some strategic decisions, including our plan for the disposal of Education Software Solutions, a standalone business in our Software division.”
Bringing forward the sale of Education Software will allow the proceeds to be used strengthen the balance sheet, where net debt reduced to £1.1bn from £1.3bn over the past six months.
Even though net debt is expected to creep back to square one by the end of the year, the company had £704.1m liquidity at June 30 and said it expects to comply with debt covenants in the second half.
Lewis said he plans to make further disposals to help strengthen the balance sheet “and help build towards a more focused, sustainable Capita for the long term”, though the coronavirus pandemic is expected to “continue to negatively impact volumes and transactional revenue” in the second half and beyond.
Shares in the company fell 9% in early trading on Tuesday to 32.5p, down more than 80% since the start of the year.
Broker Peel Hunt said: “Capita has ample liquidity, but headroom against the leverage covenant is low for December 2020E, and leverage remains high in December 2021E.
“A successful disposal of ESS at the speculated valuation (£500-700m) would materially reduce leverage to an acceptable level, but that is unlikely to be before 4Q.”