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After recent profit warnings, could Capita be the next Carillion?

After recent profit warnings, could Capita be the next Carillion?

YES – Alexander Hitchcock, research manager at Reform.

No business is immune from failure, nor should it be. Capita has warned on profits and its share price fell 45 per cent by mid-afternoon yesterday. Its chief executive argues that it has become “too complex”.

All eyes are on public-service outsourcing markets this year. It is true that successive governments have not managed these markets properly. Aggressive pricing and prescriptive contracts have put severe pressure on charities as well as public and private-sector providers. This approach puts companies like Capita under undue pressure.

But we must not forget that outsourcing delivers cost-effective services in many areas. Capita administers public-sector pensions, helplines, and London’s congestion charge. Polling by the Reform think tank shows that 60 per cent of the public don't mind who provides a service if access is fair.

Company failure from healthy competition is natural, but the government should pay careful attention to building robust markets. It has no responsibility to protect individual firms, but it can help shape a more resilient business environment.

NO – Neil Wilson, senior market analyst at ETX Capital.

Like Carillion, Capita became too complex, relied too much on acquisitions to drive growth and issued multiple profits warnings. Unlike Carillion, it is throwing everything at the problem before it’s too late.

A rights issue of £700m dilutes shareholder value, but is essential to the long-term viability of the company; it’s a tech business and needs to invest. Efficiencies and divesting non-core assets will help repair the balance sheet and free it to refocus on what it’s good at. Cutting the dividend saves £200m annually.

Moreover, things are already moving in the right direction. Net debt is down from close to £2bn in 2016 to £1.15bn; leverage from near x3 earnings last year to around x2.25. The pension deficit is high, but expected to be “significantly below” the £381m previously estimated.

Capita’s real problem is contract attrition and a slowdown in new work. It has watched Carillion and has decided that to restore confidence it needs to restore the balance sheet, leaving no excuse for the government to worry about awarding it work.

Original Article

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