* Cuts 2016 profit forecast for second time in three months
* Shares fall 12.9 pct
* Says asset sales, cost-cutting to protect dividend
* Sees no need for capital hike
* Analysts say slowdown has revealed flaws in strategy
(Adds comments by analysts, updates share price fall)
By Elisabeth O'Leary
EDINBURGH, Dec 8 Outsourcing group Capita
announced the sale of its asset management services arm
alongside a second profit warning in three months on Thursday,
exposing flaws in its strategy made worse by the Brexit vote and
sending its share price crashing.
The company, which provides IT-enabled business services to
banks and investors, the national health service, retailers and
utilities, also announced more cost-cutting plans and other
asset sales to make its debt more manageable as earnings come
Analysts said the sale of what many described as the
company's "crown jewel", its lucrative Capita Asset Services
business, suggested the company was struggling to raise cash to
make up for lower than expected revenues on major contracts.
That in turn was a result of a slowdown in new orders coming
through as new customers hesitate to commit in the wake of
Britain's vote to leave the European Union.
The company is under pressure to offer more services that
differentiate it from competitors, but analysts criticised the
management for what looked like a rushed change of strategy
after the share price started to plunge in September.
"They clearly haven't been repositioning to adapt to changes
in the market," said Rory McKenzie, analyst at UBS, who pointed
to increased competition in the sector in recent years.
"The reliance on discretionary spend at both Capita and
(rival) Mitie has not just been huge, but a huge
surprise," he added. UBS has a neutral recommendation on
Capita's shares and a 675 pence target price.
The market value of Capita, already sliced in half since
September's profit-warning, fell another 12.9 percent to 3.3
billion pounds, with the shares at 490 pence.
Shares in rival Mitie, which has also complained of a
slowdown in new business since the Brexit vote and issued two
profit warnings since September, were down 2 percent at 211
Capita now expects to make an underlying profit before tax
in 2016 of at least 515 million pounds ($651 million), down from
its reduced forecast in September of 535-555 million pounds.
The company itself pointed to its IT services and the
structure of the business units, which it is now in the process
of simplifying, as weak spots.
Beyond that, details on problem spots provided by the
company were few and analysts questioned the sale of the CAS
unit, which provides 60 million pounds of annual operating
"We see the disposals as a reaction to the balance sheet
position rather than having any clear strategic logic," said
Andrew Brooke at RBC, who had forecast more trouble for Capita
following the last earnings downgrade. He has a target price of
564 pence and a "sector perform" recommendation.
Capita said its net debt to core earnings ratio would fall
to under 2.5 times by the time asset sales are completed in
roughly a year's time, compared with an expected level of 2.9
times at end-March. Currently the net debt to EBITDA ratio
stands at 2.5.
In the meantime, the trading outlook seems uncertain.
"Colour on cost-cutting has been scant at best and they
haven't offered anything to make me think there is any recovery
potential. No-one knows what Brexit means yet and their clients
don't know either, so potentially it's a vicious circle," Mike
van Dulken, head of research at Accendo Markets, said.
Capita identified problems at its IT services division.
"There's been a fallaway in what we would call discretionary
spend, like training and (providing) employee benefits. People
are delaying making decisions on implementing technology, so
there is a whole host of things going on," Chief Executive Andy
Parker told Reuters.
The September downgrade had already alarmed investors,
bringing into doubt whether its dividend payout would be
maintained and the possibility of a capital hike. Mitie has also
issued two profit warnings in as many months.
In a measure of the grim business outlook, the bid pipeline
for new contracts now stands at 3.8 billion pounds, down 25
percent since July. In comparison, Capita's reported revenue
last year totalled 4.7 billion pounds.
Parker said he was "absolutely" confident that the company's
actions would allay the need to raise capital or cut the
"We're expecting next year to be very much a transitional
year, with similar trading ... moving to sustainable growth in
2018," Parker told Reuters.
Capita is predominantly UK-based, unlike bigger rivals such
as G4S and Serco that have been sheltered to a
large degree from Brexit-related fallout by their bigger
($1 = 0.7908 pounds)
(With additional reporting by Kate Holton Editing by Tom
Pfeiffer and Greg Mahlich)