Capita to sell asset services business, cuts full year guidance

8th Dec 2016 07:27

(ShareCast News) - Dogged by weak growth and high debts, Capita has decided to offload the majority of its Asset Services division and a small number of other 'non-core' businesses, together with slashing 2,000 jobs in order to become leaner, cut debt and focus fully on business process outsourcing.The FTSE 100 company, whose shares have been in free-fall since a major profit warning in September, also cut its full year guidance for underlying profit before tax to "at least £515m", down from its previously lowered range of £535-555m, and said the headwinds affecting the business are expected to produce a similar trading performance in the full-year 2017.Trading has deteriorated with accelerating weakness in IT reselling and corporate discretionary spend deteriorating elsewhere.But the dividend has remained sacrosanct, with the board planning to keep the year's total at 31.7p and hopeful it can "maintain the dividend in 2017, rebuild dividend cover in the medium term and return to steady dividend growth more reflective of the organic growth of the company thereafter".The anticipated sale of the asset services business, which it hopes to complete during the second half of 2017, should allow Capita to allay a major investor worry by reducing gearing and strengthening the balance sheet, but removes one of the biggest contributors to underlying profits.Net debt at the end of December 2016 is expected to be similar to net debt at the end of June 2016 though lower earnings this will mean the ratio of net debt to annualised EBITDA will rise to 2.9 times from the 2.5 at end June. But if Capita Asset Services is successfully sold, the board expect group leverage to be "around the bottom end" of its 2.0-2.5 long term target range.In the current year the asset services businesses, which provide financial outsourcing services to institutional, corporate and private clients, are expected to contribute operating profit of £60m, together with up to £10m from the other trading businesses, while the sales means the bid pipeline was guided to fall from £5.1bn in July to £3.8bn now.Capita's 11 divisions will in January be trimmed into six market-facing divisions, or five once the asset services business is sold, with a central major sales team and each arm reporting directly to chief executive Andy Parker.Although the cost base was already seen as fairly lean, Parker is also restructuring to an even leaner model, cutting 3% of the headcount and taking a £50m charge, with the benefits to flow from next year into the 2018 financial year."We have also commenced a programme of cost reduction and investments to position the company strongly for renewed future growth," said Parker."Together, these actions will create a leaner Capita, focused on its core strengths and with a much stronger balance sheet."He expressed confidence the markets Capita addresses still offer the potential for long-term structural growth but acknowledged there were "some near-term headwinds, which continue to make 2016 a challenging year and will affect trading performance in the first half of 2017"."Our long-term contracts provide us with good revenue visibility across the year and the structural and cost reduction actions we are taking now will support progress in the second half of 2017 and into 2018. We therefore currently expect a similar trading performance to 2016 in the full-year 2017."Analyst reactionShares in Capita were down 8% by 1045 GMT on Thursday morning to 519.5p, having earlier come close to breaching the 500p mark for the first time in a decade. Technical analysts suggested there may be a smooth path all the way down to around 400p.Broker Shore Capital said the statement was "grim reading", understanding the 2017 outlook as Capita downgrading guidance on the financial out-turn, which will further pressure the balance sheet.The £50m cost of restructuring is less than the analysts expected, but further, higher charges "cannot be ruled out" next year.ShoreCap expects to reduce 2016 adjusted PBT forecast from £536m to circa £520m, taking EPS down from 65.1p down to circa 63.0p, while for 2017 it expects a downgrade in the region of 15%.Mike van Dulken at Accendo Markets said another profit warning was an "unwelcome early Christmas present", while a flat 2016 dividend is understandable, "mere 'hopes' that it can be maintained in 2017 is not exactly inspiring for those requiring income and/or sitting on big capital losses".On the disposal of the Assets Services division, he said while it is viewed as non-core, the unit accounts for nearly 10% of revenues, is a contributor of 16% of underlying profits and appears to be performing well."With other divisions in the firing line, shrinking the group may well lead to long-term improvements in profitability, but it also means more restructuring and more exceptional costs in the quarters to come. Further government-inspired Brexit uncertainty and clients shying away may also even mean that further profits warnings can't be excluded either," van Dulken said.Assuming adjusted PBT guidance for 2017 of similar to 2016 and total disposal proceeds in the £700m to £800m range, Deutsche Bank said that "high single/low double digit EPS dilution on top of the trading downgrade" was likely for next year.DB analysts said this level of proceeds would lead to p/e valuations of roughly 10-11 times, the same 5.5% dividend yield and a lower near-7% ratio of free cash flow yield to enterprise value."The company would still face high attrition... and the bid pipeline has now fallen to £3.8bn...However, there would be no immediate balance sheet risk and the company is holding the dividend."