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Abu Dhabi, UAEWednesday 20 June 2018

UK's Capita shares plunges as new CEO halts dividend, plans rights issue

Outsource firms on edge following Carillion collapse earlier this month

A road sign marks the start of London's congestion charge area, managed by Capita. The firm's shares plunged after a shock profit warning. Alessia Pierdomenico / Reuters
A road sign marks the start of London's congestion charge area, managed by Capita. The firm's shares plunged after a shock profit warning. Alessia Pierdomenico / Reuters

Capita slumped the most in 24 years after its new chief executive announced plans for a rights issue and suspended dividend payouts.

The London firm, which provides customer services functions for firms like Telefonica’s O2 and retailer Marks & Spencer Group, will seek to raise as much as £700 million ($993.8m), and said it plans to sell some non-core assets. The stock fell as much as 41 per cent, the most since February 1994.

“Significant change is required for Capita’s next stage of development,” chief executive Jon Lewis, who started in the role on December 1, said in a statement. “Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility,” he added.

Jefferies analyst Kean Marden said in a note that the “kitchen sink” plan echoes similar steps by other outsourcing firms Serco Group and Mitie Group, as well as energy company Amec Foster Wheeler where Lewis worked previously. Consensus earnings per share estimates, once analysts have included rights issue and bonus factor adjustments, could fall by about 40 per cent, Mr Marden said.

Capita’s warning comes at a time when British outsourcing companies face increasing economic uncertainty, and follows the collapse of construction and services firm Carillion earlier this month.

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Capita has warned of reduced spending by corporate clients several times since the UK voted to leave the European Union in 2016. It said on Wednesday that it now expects adjusted pretax profit for 2018, before significant new contracts and restructuring costs, to be between £270-300m.

Mr Lewis dismissed similarities between the firm and other outsourcers on a call with analysts. “We should not be compared to the ‘G4Ss and Interserves’ of the world,” he said. “We are not a blue collar firm, we are a tech-enabled digitally focused company.” He declined to confirm if the company had government contracts worth £600m.

Capita shares were trading down 40 per cent at 9.16am in London. G4S, Interserve, Mitie and Serco also declined in early trading.

“We are taking very positive steps to address sins of the past,” Mr Lewis said, “which is better than kicking the can down the road and hoping that the markets are just going to turn around.”

The company has now identified a small number of businesses that are considered non-core, including ParkingEye and Constructionline, and said a disposal programme for these assets will commence shortly.

Capita’s plan to focus on a smaller number of better positioned business, with a strengthened balance sheet, allowing appropriate levels of investment, “are welcome steps in the right direction,” Peel Hunt analyst Christopher Bamberry wrote in a note.

Capita chief financial officer Nick Greatorex said the firm continued to experience delays in decision making by clients, contributing to weaker overall sales. That includes a significant contract and volume attrition in its IT services divisions, he said on the call.