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Trading remains in line with expectations despite challenging market conditions for Capita

Capita plc has released its pre-close trading update covering the Group’s performance to date in 2017.

Trading in the year to date has been in line with its expectations. Capita continues to expect underlying pre-tax profits, before significant new contracts and restructuring costs, to rise modestly in the second half of this year in line with previous guidance.

The market for major business process management contracts has remained subdued throughout 2017, particularly in the public sector. Capita has secured major contracts with an aggregate total value of £471m in the year to date. Since the half year, it has won a new seven-year contract with the Cabinet Office to administer the Royal Mail Statutory Pension Scheme (RMSPS) for its 400,000 deferred members and pension members and an extension of our customer management contract with British Gas to April 2019.

The value of its bid pipeline is currently £2.5bn. We expect a number of bid decisions in the coming months. If successful, these bids are unlikely to be accretive to profits in 2018, due to the phasing of revenue and costs under IFRS 15, but are expected to create value for shareholders over their lifetime.

Since the half year results, although market conditions have remained challenging, underlying trading across its divisions has been in line with the company’s expectations.

For the full year, Capita expects good underlying profits growth in the private sector partnerships division as a result of improvements in the performance of a number of major contracts and cost initiatives. However, it anticipates a higher level of contract and volume attrition which, subject to mitigating actions on sales conversion and costs, could impact upon the performance of the division in 2018.

Public services partnerships has made encouraging progress and profitability has improved, albeit including a forecast contribution of around £22m from the Defence Infrastructure Organisation contract which will not recur next year.

The performance of its IT Services division has also improved, due to cost actions, although we expect the profits of this division to be slightly lower in the second half compared to the first half of the year as a result of the non-recurrence of a £9m one-off supplier settlement.

The end of two major software licences in the second half of 2016 is expected to result in a decline of profits in the digital & software solutions division. Professional Services has made steady progress and traded in line with management expectations.    

Capita has continued to progress the short and long term cost initiatives announced in the 2016 restructuring programme, including reductions in overheads and rationalising its property estate. The cumulative benefit of these actions is still expected to be £57m by the end of 2018.

Capita is in the process of broadening the programme to transform the Group, including the identification of further opportunities to improve cost competitiveness. It currently expects to incur restructuring charges of around £18m this year, which will be disclosed as an operating loss under significant new contract wins and restructuring. This includes costs in relation to the broadened transformation programme, which will benefit the Group over the long term, and, separately, the restructuring of a small number of businesses.

The company expects to record a number of non-underlying items in 2017, including a significant gain on the disposal of the Capita Asset Services businesses and costs in relation to the agreed full and final settlement with the Financial Conduct Authority regarding the Connaught Income Series 1 Fund.

As indicated at its half year results, Capita is still in discussion with a major life and pensions client, the outcome of which it now believes is likely to lead to an impairment in 2017 of the supporting assets relating to this contract.

Finally, as part of the year-end close process, the company also expects to record a number of other tangible and intangible asset impairments in 2017, which will not affect future cash flow. These include the recognition of goodwill impairment charges, as a result of the annual impairment test, on a number of businesses which have experienced more difficult trading conditions since being acquired and the impairment of assets which, as a result of events during 2017, have ceased to be of value to the Group.

Capita’s net debt to annualised EBITDA ratio at end June was 2.9 times. The company expects leverage to fall to around the middle of its 2.0 to 2.5 times range at the end of 2017, including contingent obligations under bonds and guarantees. This reflects the receipt of proceeds from the disposal of its Capita Asset Services businesses, partially offset by the unwinding of an historic seasonally favourable working capital position at year end and some reduction in receivables financing.

Jonathan Lewis started as chief executive officer (CEO) on 1st December 2017, at which point he also joined the Capita plc Board.

Capita continues to expect underlying pre-tax profits, before significant new contracts and restructuring, to rise modestly in the second half of this year, compared to the first half of 2017.

Its final results are due on 1st March. Over the course of next year, it will communicate the new programme to broaden the transformation of Capita. This will include plans to focus the business and allocation of capital and resources on the markets which offer the best growth prospects; improve its cost competitiveness further; recharge its sales performance and, ultimately, demonstrate how it delivers value to all of its employees, customers and shareholders.

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