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Capita shares hit 15-year low after shock profits warning - business live Capita shares hit 15-year low after shock profits warning - business live
(35 minutes later)
Andrew Brooke, analyst at Royal Bank of Canada, has chewed through Capita’s profit warning - and concluded that it’s “clearly a mess”.
He adds:
Too many uncertainties for us and it’s tough to raise money when you don’t have a strategy yet.
Over at parliament, Labour MP Ian Mearns has raised the issue of Carillion’s collapse two weeks ago, at Prime Minister’s Questions.
Mearns says Carillion workers and apprentices in his Gateshead constituency face an uncertain future following the company’s collapse.
He asks the government to act to prevent future “corporate theft” where “pirate directors” siphon off money that should have gone into pension funds and using it to pay dividends and bonuses.
Cabinet Office minister David Lidington (who has stepped in as Theresa May is in China) says good progress is being made in finding new position for former Carillion apprentices.
He says the government won’t pre-empt the Official Receiver’s inquiry into Carillion, but adds that the government will publish proposals later this year to stop directors “siphoning off” pension funds.
My colleague Andrew Sparrow is tracking all the PMQs action:
Capita’s problems mean local and national procurement officers face a tricky decision.Capita’s problems mean local and national procurement officers face a tricky decision.
They might be tempted to shy away from the company, following today’s profit warning.They might be tempted to shy away from the company, following today’s profit warning.
But Sky News’s Adam Parsons points out, such a policy would leave councils and government departments with nowhere to turn:But Sky News’s Adam Parsons points out, such a policy would leave councils and government departments with nowhere to turn:
On Capita: Government can't stop giving infrastructure contracts to everyone who delivered a profits warning. The whole process would grind to a halt, the industry would collapse.Carillion wasn't just warning - it was dyingOn Capita: Government can't stop giving infrastructure contracts to everyone who delivered a profits warning. The whole process would grind to a halt, the industry would collapse.Carillion wasn't just warning - it was dying
Matt Cockbill, head of the IT and digital leadership practice at Berwick Partners, argues that Capita’s team are making some “radical overhauls”.Matt Cockbill, head of the IT and digital leadership practice at Berwick Partners, argues that Capita’s team are making some “radical overhauls”.
“Change is an accepted part of business and we need only look at Carillion as an example of where action was taken too late in the day.“Change is an accepted part of business and we need only look at Carillion as an example of where action was taken too late in the day.
“Any organisation that recognises that it’s position is weakening and takes proactive and pragmatic steps to understand why - before filling the voids, assessing market impacts and managing the risks will prosper. In some cases this calls for the help of change leaders, and while Capita is in the early stages, its chiefs seem to be taking steps in the right direction.”“Any organisation that recognises that it’s position is weakening and takes proactive and pragmatic steps to understand why - before filling the voids, assessing market impacts and managing the risks will prosper. In some cases this calls for the help of change leaders, and while Capita is in the early stages, its chiefs seem to be taking steps in the right direction.”
Capita was founded in 1984 when ex- local government officer Rod Aldridge led a management buyout of the business from the Chartered Institute of Public Finance and Accountancy. At the time it had 33 employees.Capita was founded in 1984 when ex- local government officer Rod Aldridge led a management buyout of the business from the Chartered Institute of Public Finance and Accountancy. At the time it had 33 employees.
The company joined the stock market in 1991 and became a member of the FTSE 100 in 2006.The company joined the stock market in 1991 and became a member of the FTSE 100 in 2006.
In the same year Aldridge resigned as executive chairman after it was revealed he had lent the Labour party £1m. He denied suggestions the loan had any influence on the company winning government contracts but said he would step down to avoid any further controversy.In the same year Aldridge resigned as executive chairman after it was revealed he had lent the Labour party £1m. He denied suggestions the loan had any influence on the company winning government contracts but said he would step down to avoid any further controversy.
He was replaced by Paul Pindar who became one of Britain’s best paid businessmen, earning £2.5m in 2012. He stepped down from the group in 2014 to move into private equity.He was replaced by Paul Pindar who became one of Britain’s best paid businessmen, earning £2.5m in 2012. He stepped down from the group in 2014 to move into private equity.
Capita grew largely through acquisitions, but a series of profit warnings saw it lose its place in the FTSE 100 in March 2017.Capita grew largely through acquisitions, but a series of profit warnings saw it lose its place in the FTSE 100 in March 2017.
• Employees: 67,000 (About 50,000 based in the UK)• Employees: 67,000 (About 50,000 based in the UK)
• Revenue (2016): £4.9bn• Revenue (2016): £4.9bn
• Pre-tax profit (2016): £475m• Pre-tax profit (2016): £475m
• Proportion of business in public sector: 47%• Proportion of business in public sector: 47%
• Dividend payout (2016): £210m• Dividend payout (2016): £210m
• Net debt (expected at end of 2017): £1.15bn• Net debt (expected at end of 2017): £1.15bn
• Pension deficit: £381m• Pension deficit: £381m
• Share price peak: £13.26 July 2015• Share price peak: £13.26 July 2015
• Share price now: 196p• Share price now: 196p
• Market capitalisation at peak: £8.8bn• Market capitalisation at peak: £8.8bn
• Market capitalisation now: £1.3bn• Market capitalisation now: £1.3bn
Few City experts had spotted the full state of the problems at Capita.Few City experts had spotted the full state of the problems at Capita.
According to Reuters data, nine analysts rated Capita as a ‘hold’, while just two recommended selling the company.According to Reuters data, nine analysts rated Capita as a ‘hold’, while just two recommended selling the company.
One had it as a ‘buy’, while two optimists reckoned Capita was a ‘strong buy’ (they presumably have some explaining to do this morning).One had it as a ‘buy’, while two optimists reckoned Capita was a ‘strong buy’ (they presumably have some explaining to do this morning).
Even star investor Neil Woodford has been caught out. He recently increased his holding in Capita, having spotted the potential for “significant value creation”. Morning Star has more details.Even star investor Neil Woodford has been caught out. He recently increased his holding in Capita, having spotted the potential for “significant value creation”. Morning Star has more details.
Panmure Gordon called it right, though:Panmure Gordon called it right, though:
Michael Donnelly, @PanmureGordon support services analyst has had a sell on Capita since January 2016 when price was £11.60. Today trading at £2.25. I know sell-side get a bad rep but 👏👏Michael Donnelly, @PanmureGordon support services analyst has had a sell on Capita since January 2016 when price was £11.60. Today trading at £2.25. I know sell-side get a bad rep but 👏👏
There may be champagne corks popping in Mayfair today.There may be champagne corks popping in Mayfair today.
Capita (like Carillion) had been a target for hedge funds who had bet against the company by ‘shorting’ its stock (by borrowing it, selling it, and planning to buy it back at a profit).Capita (like Carillion) had been a target for hedge funds who had bet against the company by ‘shorting’ its stock (by borrowing it, selling it, and planning to buy it back at a profit).
Any speculator who shorted Capita in recent months will be sitting on a decent profit.Any speculator who shorted Capita in recent months will be sitting on a decent profit.
#Capita short sellers are in heaven today... short interest about 8% of free float https://t.co/PYhWYC1e7X @markets pic.twitter.com/eBo5LbUp8N#Capita short sellers are in heaven today... short interest about 8% of free float https://t.co/PYhWYC1e7X @markets pic.twitter.com/eBo5LbUp8N
Capita’s profits warning has hit shares in other outsourcing companies:Capita’s profits warning has hit shares in other outsourcing companies:
Outsourcing sector wobbles slightly after Capita slumps 43%: Serco (-3.9%); Interserve (-1.9%) Kier (-1.3%); G4S (-1.1%)Outsourcing sector wobbles slightly after Capita slumps 43%: Serco (-3.9%); Interserve (-1.9%) Kier (-1.3%); G4S (-1.1%)
In today’s statement, CEO Jonathan Lewis warns that Capita has seen “delays in decision making and weakness in new sales” since December; a sign that the market is deteriorating?In today’s statement, CEO Jonathan Lewis warns that Capita has seen “delays in decision making and weakness in new sales” since December; a sign that the market is deteriorating?
Helal Miah, investment research analyst at The Share Centre, says Capita’s new boss, Jonathan Lewis, is trying to avoid suffering Carillion’s fate.Helal Miah, investment research analyst at The Share Centre, says Capita’s new boss, Jonathan Lewis, is trying to avoid suffering Carillion’s fate.
Miah writes:Miah writes:
“Another government contractor appears in trouble, but at least Capita are making drastic changes before it’s too late. With a new CEO in place for less than two months, it should be no surprise that the troubled group has today announced a deep restructuring programme.“Another government contractor appears in trouble, but at least Capita are making drastic changes before it’s too late. With a new CEO in place for less than two months, it should be no surprise that the troubled group has today announced a deep restructuring programme.
This comes after a review of the business by the new management which found that the group has underinvested, has a short term focus, is too focussed on acquisitions to drive growth as well as lacks operational discipline and financial flexibly.This comes after a review of the business by the new management which found that the group has underinvested, has a short term focus, is too focussed on acquisitions to drive growth as well as lacks operational discipline and financial flexibly.
Miah add that Capita could become another “hot political issue”, given its critical role in local and central government.Miah add that Capita could become another “hot political issue”, given its critical role in local and central government.
The government have already placed other companies on watch after the Carillion fiasco; no doubt some will say that Capita should be on that list too. The sector in general hasn’t had a great few years and this has been exacerbated by Brexit where contract awards have been delayed due to uncertainty.The government have already placed other companies on watch after the Carillion fiasco; no doubt some will say that Capita should be on that list too. The sector in general hasn’t had a great few years and this has been exacerbated by Brexit where contract awards have been delayed due to uncertainty.
Terms like ‘plunged’, ‘nosedived’ and ‘crashed’ get banded about too easily in the City.Terms like ‘plunged’, ‘nosedived’ and ‘crashed’ get banded about too easily in the City.
But in Capita’s care, they’re fully justified.But in Capita’s care, they’re fully justified.
Shares are now down an alarming 45% at just 190p, which is the lowest level since January 2003.Shares are now down an alarming 45% at just 190p, which is the lowest level since January 2003.
This means that Capita is now worth just £1.3bn. That’s barely more than its net debt, which is estimated to be £1.1bn.This means that Capita is now worth just £1.3bn. That’s barely more than its net debt, which is estimated to be £1.1bn.
News of a stonking profits warning, a £700m rights issue and the suspension of the company’s dividend have sent investors racing to get out.News of a stonking profits warning, a £700m rights issue and the suspension of the company’s dividend have sent investors racing to get out.
Michael Hewson of CMC Markets says:Michael Hewson of CMC Markets says:
This is a bold move by new CEO Jonathan Lewis and the fact that he thinks that this sort of restructuring is necessary, speaks volumes to the current sentiment around the outsourcing industry in the wake of Carillion’s insolvency.This is a bold move by new CEO Jonathan Lewis and the fact that he thinks that this sort of restructuring is necessary, speaks volumes to the current sentiment around the outsourcing industry in the wake of Carillion’s insolvency.
Concerns over debt levels and pension deficits, along with the over-diversification of the business appears to have prompted this significant slim lining approach.Concerns over debt levels and pension deficits, along with the over-diversification of the business appears to have prompted this significant slim lining approach.
Hewson is also concerned by the pension deficit, which seems to have swelled sharply recently.Hewson is also concerned by the pension deficit, which seems to have swelled sharply recently.
In 2015 it stood at £188m, and was estimated to be £381m as of June last year, with management undertaking to set aside an extra £21m in 2018 to get this number back down. In light of the problems exposed at Carillion the big jump in this number is a particular concern and exposes some particularly uncomfortable truths about shareholders holding management to account.In 2015 it stood at £188m, and was estimated to be £381m as of June last year, with management undertaking to set aside an extra £21m in 2018 to get this number back down. In light of the problems exposed at Carillion the big jump in this number is a particular concern and exposes some particularly uncomfortable truths about shareholders holding management to account.
Here’s an excellent chart from Tussell, the data firm, showing how Capita dominates the UK’s outsourcing sector:Here’s an excellent chart from Tussell, the data firm, showing how Capita dominates the UK’s outsourcing sector:
On mornings like today @tussell_UK are the guys for the best data on UK public sector contracts. 226 awarded to Capita in last 2 years. More than ten times the number awarded to Carillion over the same period. pic.twitter.com/HmeHdR97DoOn mornings like today @tussell_UK are the guys for the best data on UK public sector contracts. 226 awarded to Capita in last 2 years. More than ten times the number awarded to Carillion over the same period. pic.twitter.com/HmeHdR97Do
Britain’s trade unions are also alarmed by this latest crisis in the UK outsourcing sector.Britain’s trade unions are also alarmed by this latest crisis in the UK outsourcing sector.
TUC General Secretary Frances O’Grady has echoed Labour’s call for the government to act now.TUC General Secretary Frances O’Grady has echoed Labour’s call for the government to act now.
She says:She says:
Today’s profit warning from Capita is really worrying.Today’s profit warning from Capita is really worrying.
“That’s why the TUC is calling for an urgent risk assessment of all large outsourcing firms. It’s essential the government completes this quickly and is prepared to bring services and contracts in-house if they are at risk.“That’s why the TUC is calling for an urgent risk assessment of all large outsourcing firms. It’s essential the government completes this quickly and is prepared to bring services and contracts in-house if they are at risk.
“We can’t afford another Carillion.”“We can’t afford another Carillion.”
Jon Trickett MP, Labour’s Shadow Minister for the Cabinet Office, has urged the government to put Capita under close review.Jon Trickett MP, Labour’s Shadow Minister for the Cabinet Office, has urged the government to put Capita under close review.
Trickett says:Trickett says:
“We cannot afford another Carillion. The Government must take serious steps to oversee the activities of Capita, which is the third major outsourcing company in the last month to issue profit warnings.“We cannot afford another Carillion. The Government must take serious steps to oversee the activities of Capita, which is the third major outsourcing company in the last month to issue profit warnings.
“The Tories’ privatisation dogma risks lurching our public services from crisis to crisis, threatening jobs, taxpayers’ money and leaving people without the services they need.“The Tories’ privatisation dogma risks lurching our public services from crisis to crisis, threatening jobs, taxpayers’ money and leaving people without the services they need.
“The Government must end its ideological attachment to private profit in public services and instead start putting the public interest first.”“The Government must end its ideological attachment to private profit in public services and instead start putting the public interest first.”
Capita CEO Jonathan Lewis has been speaking to City analysts.Capita CEO Jonathan Lewis has been speaking to City analysts.
He warned that overhauling the outsourcing group would take at least two years, admitting there is “much to be done”.He warned that overhauling the outsourcing group would take at least two years, admitting there is “much to be done”.
Lewis says he wants to fix the “sins of the past” by pumping more money into IT and automation. Today’s moves are the “first steps” on the road to recovery, he adds.Lewis says he wants to fix the “sins of the past” by pumping more money into IT and automation. Today’s moves are the “first steps” on the road to recovery, he adds.
Capita’s share price is plumbing new debts. It’s now down 41% at just 204p, down from 347p last night.Capita’s share price is plumbing new debts. It’s now down 41% at just 204p, down from 347p last night.
Earlier this week, the Guardian’s Public Leaders Network warned that local councils were too reliant on major outsourcers.Earlier this week, the Guardian’s Public Leaders Network warned that local councils were too reliant on major outsourcers.
Joanne Fry, a senior local government officer, wrote:Joanne Fry, a senior local government officer, wrote:
Carillion mainly ran large private finance initiative contracts – building hospitals, for instance. But firms like Capita, Serco and Veolia run a huge range of different council services, from IT and HR to waste collection, recycling, street cleaning and maintenance. If they were to fail, the risk to councils would be very high.Carillion mainly ran large private finance initiative contracts – building hospitals, for instance. But firms like Capita, Serco and Veolia run a huge range of different council services, from IT and HR to waste collection, recycling, street cleaning and maintenance. If they were to fail, the risk to councils would be very high.
It has become increasingly clear that the business model around outsourcing – or managed services in local government speak – is fundamentally at fault.It has become increasingly clear that the business model around outsourcing – or managed services in local government speak – is fundamentally at fault.
More here:More here:
Capita is also heavily involved in Britain’s pensions industry. It’s been running the UK’s Teacher’s pension scheme since 1996, and last October, it took over the administration of the Royal Mail’s pension fund.Capita is also heavily involved in Britain’s pensions industry. It’s been running the UK’s Teacher’s pension scheme since 1996, and last October, it took over the administration of the Royal Mail’s pension fund.
It even has a contract with the UK’s pension regulator, to help roll out automatic enrolment (AE) to small and micro employers.It even has a contract with the UK’s pension regulator, to help roll out automatic enrolment (AE) to small and micro employers.
But closer to home, Capita also faces a pension deficit of its own, of around £380m.But closer to home, Capita also faces a pension deficit of its own, of around £380m.
Today’s statement says:Today’s statement says:
We are currently undertaking a triennial review of the pension scheme. Our current expectation is that the actuarial deficit after this review will be significantly below the last disclosed IAS19 deficit of £381m at 30 June 2017.We are currently undertaking a triennial review of the pension scheme. Our current expectation is that the actuarial deficit after this review will be significantly below the last disclosed IAS19 deficit of £381m at 30 June 2017.
In addition to our annual contribution, we are committed to an additional contribution of £21m in 2018.In addition to our annual contribution, we are committed to an additional contribution of £21m in 2018.
We will seek to reduce the remaining deficit as a priority.We will seek to reduce the remaining deficit as a priority.
Earlier this month, my colleague Nick Fletcher ran the rule over the outsourcing industry, following Carillion’s slump into liquidation.Earlier this month, my colleague Nick Fletcher ran the rule over the outsourcing industry, following Carillion’s slump into liquidation.
He wrote:He wrote:
About half of Capita’s annual turnover of £4.9bn comes from central and local government work, ranging from administering the teachers’ pension scheme to providing tech services to the NHS, electronic monitoring services and running the Gas Safe register for the Health and Safety Executive. It has 70,000 UK employees, and a net debt of £1.6bn compared with its market value of £2.8bn.About half of Capita’s annual turnover of £4.9bn comes from central and local government work, ranging from administering the teachers’ pension scheme to providing tech services to the NHS, electronic monitoring services and running the Gas Safe register for the Health and Safety Executive. It has 70,000 UK employees, and a net debt of £1.6bn compared with its market value of £2.8bn.
The company’s shares have lost two-thirds of their value over the past two years after a series of profit warnings and boardroom changes.The company’s shares have lost two-thirds of their value over the past two years after a series of profit warnings and boardroom changes.
Bloomberg points out that Capita doesn’t only run public sector services. It also provides customer service and IT services for some of Britain’s biggest companies.Bloomberg points out that Capita doesn’t only run public sector services. It also provides customer service and IT services for some of Britain’s biggest companies.
For example, earlier this month it won a new five-year contract with Marks & Spencer; last August, it extended a mortgage outsourcing deal with Tesco Bank.For example, earlier this month it won a new five-year contract with Marks & Spencer; last August, it extended a mortgage outsourcing deal with Tesco Bank.