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IT enterprise services division slowdown impacts upon Capita’s profit expectations

Capita plc (‘Capita’) has issued a trading statement covering second half performance to date and the outlook for the full year 2016.


Capita achieved good profit growth in the first half of 2016, at which time it expected organic revenue growth of around 4% for the full year. Subsequently, its performance in the second half of the year to date has been below expectations, as a result of a slow-down in specific trading businesses, one-off costs incurred on the Transport for London (TfL) congestion charging contract and continued delays in client decision making. As a result, the company now expects revenue growth for the full year to be in the range of 4-5%, including around 1% organic growth net of attrition, and underlying profit before tax to be in the range of £535m to £555m for the full year to December 2016, compared to the current company compiled consensus profit before tax estimate of £614m.


The Group has been impacted by a recent slow-down in the IT enterprise services division, in particular its technology reseller business, and specialist recruitment in the workplace services division. Since the half year, the company’s expectations for profits from these businesses for the full year has reduced by around £30m. Capita is taking immediate steps to reduce the cost base in the underperforming businesses, which should benefit 2017. The digital & software solutions division continues to perform well but, as referenced at its first half results, its asset services division has seen less activity in the short term, following the EU referendum.


The company states it has experienced delays on the implementation of new IT systems on the Transport for London (TfL) congestion charging contract. As a result, it expects to incur between £20m and £25m of one-off costs, which will be included in its underlying results. Capita says that the systems have now gone live, the contract is performing well operationally and these costs will not recur next year. Furthermore, the company states it is in a contractual dispute with the Co-op Bank regarding obligations relating to the transformation of services.  The ongoing mortgage processing being undertaken by Capita is performing well.  However, there is a risk of litigation in respect of the transformation.


The Group has announced £949m major contract wins in the year to date, including being recently selected by Three as the preferred bidder for a contract to provide customer management services in the UK, which is expected to start in 2017. However, revenue from new major sales in the second half of this year is likely to be lower than expected, due to continued delays in decision making and lower conversion of our pipeline.


Capita’s net debt to annualised EBITDA ratio at end June 2016 was 2.5. As a result of the aforementioned trading issues and one-offs the company now expects net debt to EBITDA to be in region of 2.7 at the year end, including a modest amount of additional acquisition spend. It continues to expect capital expenditure to be lower than last year and expect net debt at end December to be similar to net debt at end June. The company states it has good headroom and liquidity.


The company now expects revenue growth to be in the range of 4-5%, including around 1% organic growth net of attrition, and underlying profit before tax to be in the range of £535m to £555m for the full year to December 2016, compared to the current company compiled consensus profit before tax estimate of £614m. This outlook excludes the cost of potential restructuring actions and is subject to the satisfactory resolution of our dispute with the Co-op Bank.


It remains confident of the strength of its business model and aims to return the Group to profit growth next year, excluding the benefit from TfL one-off costs dropping out.


Picture courtesy of Pixabay

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