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Capita suspends dividend

Warnings of complexity and the need for restructuring have become old hat for investors in outsourcers
January 31, 2018

The outsourcing sector has proved the bears right once again. Shares in Capita (CPI) fell more than 45 per cent on the day the group announced a rights issue, suspension of the dividend and a severe cut in profit expectations. The news sparked a sell-off in the wider UK-listed outsourcing sector, including shares in Serco (SRP) and Babcock (BAB) down 3 per cent. 

IC TIP: Sell at 187p

Underlying profits for 2018 are now expected to be in the region of £270m-£300m. That's before new contracts, but also restructuring costs. This is a significant drop from the £383m forecast by analysts at Peel Hunt before the announcement.

In summarising the problems faced by the group, recently installed chief executive Jonathan Lewis said: “Today, Capita is too complex. It is driven by a short-term focus and lacks operational discipline and financial flexibility.” To get the group back on track, Mr Lewis is proposing cost savings, disposal of non-core assets and new equity.

It isn’t the first time the group has taken action to cut some of the flab out of its portfolio, jettisoning its specialist recruitment business and the asset services division. The latter sale was announced in late June last year, just before the shares went on a months' long downward spiral. Assessment of its portfolio for this latest round of cost cutting is ongoing, but already a number of businesses have been earmarked for disposal, including ParkingEye and Constructiononline.

Proceeds from the sales and other measures are to be used to reduce the group’s leverage, which management judged should be net debt of one or two times cash profits. That crept up to 2.9 times annualised cash profits in the first half of 2017, well above the company’s then target of between 2 and 2.5 times. Dividends will not resume until the company is generating sustainable free cash flow, which was reported as £182m for the first half of 2017, falling from £199m in the same period of 2016.