Capita profits plunge but 'good progress' with streamlining

1st Aug 2018 07:40

(Sharecast News) - Capita reported a collapse in profits for the first half of the year but the outsourcer's new boss assured that his plan to simplify the business was making progress.Underlying profit before tax plunged 59% to £80.5m in the six months to 30 June on revenue that fell 5% to £2.0bn at the reported level or 4% to £1.98bn at the underlying level, which excludes discontinued operations. Earnings per share plummeted 50% to 6.96p and the interim dividend was withheld and will remain so until directors are happy the business is generating sufficient sustainable free cash flow.The first half of the year has seen order intake come in lower than revenue amid low levels of bid activity last year and delays in decisions. As of 30 June, an order intake of £921m saw the order book slip to £7.7bn from £8.2bn at the end of December.As a result of this and known contract attrition, including the expected loss of a pensions and life administration contract with Prudential that represents around 2% of revenue, organic growth is expected to be weaker in the second half than the first.The FTSE 250 group, which is entrusted with the provision of services ranging from London's congestion charging monitoring, NHS back-office functions, council rubbish collections and customer services call centres, has cleaned up its balance sheet thanks to April's £701m rights issue and with £416m expected proceeds from disposals.Net debt was cut to £729.5m from £1.6bn, even though free cash flow was a negative £152m in the half-year compared to a positive £179.2m a year earlier.Chief executive Jon Lewis, who started in December, also unveiled his new strategy in April to make a company he branded "too complex" and relying too much on acquisitions for growth "more focussed and predictable", with improved returns and sustainable free cash flow. The strategy includes cutting £175m of costs by the end of 2020, with Lewis saying that the group was on track to realise £70m of these savings in 2018.Lewis warned that although "we have continued to make good progress", it was "still early days". The committee set up to review contracts and bids is "operating well" but returning to revenue growth "will take time".Capita aims is to return to organic growth in 2020, given the rejig of the sales team and the medium- to long-term nature of the sales cycles. Full year targets, adjusted for disposals, are now for underlying PBT of £250-275m, implying a narrowing of guidance at the bottom end of the range by roughly £5m.Capita shares fell more than 12% to below 142p in early trading before easing off slightly.Analysts at Citi said the adjusted PBT of £139.8m before restructuring compares with company provided consensus of £131m, but includes non-recurring £9m termination fee from lost Marsh contract."While industry momentum remains soft, Capita has a reasonably solid revenue base into which new management can reconfigure the business," they added. "The early stages of the turnaround narrative should encourage investors and draw attention to the 25% 2020E EV/EBITA discount to the Business Services sector (9.4x v 12.5x)."