Capita may be no Carillion, but it’s still not one for your “buy” list

Capita has a new man at the helm. The reason that Jonathan Lewis, the CEO, can be so scathing about the company is that he’s only just taken the job. He’s been in post for eight weeks, and he was hired precisely because of his credentials as a “turnaround specialist”. So he’s spent that time kicking the tyres, wandering around the chassis, issuing the occasional “tut tut” under his breath and shaking his head grimly as he does so. This profit warning is his way of turning around to investors and saying: “Which bunch of cowboys did this to your motor? I can fix it – but it’ll cost you.”

A new guy has every incentive to make the company look as awful as he can get away with – it’s called “kitchen sinking”. That makes it easier for him to then turn around and say that he’s “saved” it at some point in the future. So if nothing else, this is a more “controlled” situation than Carillion. Just because a company isn’t Carillion, doesn’t mean it’s a “buy”. At the same time, however, that doesn’t mean that it’s “one and done”. When Warren East took over Rolls-Royce in 2015, for example, he kicked off his tenure with an epic profit warning and then followed it up with another belter a few months later. It wasn’t until then that the company hit a bottom in share price terms. And as Lex in the FT points out, Rupert Soames (formerly of temporary power specialist Aggreko) jumped ship to sort out Serco, another outsourcing group, back in 2014. He pulled a lot of similar moves (Soames raised £500m) and the company didn’t share Carillion’s fate – but the share price hasn’t exactly sparkled since then.

I have to say, I’ve never been keen on the outsourcing sector. Every asset has its price, but outsourcing is a sector that is particularly difficult to analyse. As an investor, you should beware complexity. That makes it very easy for a company to hide its sins. You should also be wary of over-acquisitiveness – that’s a sign of a company trying to buy in growth, which makes you wonder why it can’t just achieve that by being in a decent line of business in the first place. Also – perhaps most importantly – beware of debt. Debt is the enemy of equity. The creditors get fed before you do. If there are too many of them and not enough to go round, then, as an equity owner, you get nothing.

All of these problems exist in the outsourcing sector in spades. So you can turn these companies around, maybe even convince investors to back them again. But fundamentally, is this a good line of business to be in? I don’t think so. The lack of transparency, the long-term nature of the contracts, the sprawling scale of these businesses – all of those mitigate against this being an attractive line of business. But the biggest issue is the political risk. About half of Capita’s business comes from the public sector. Outsourcing of all types has always been rife with political risk – it tends to be done by companies who want to shed jobs.

But public sector outsourcing is on another scale. It’s always easy to write an “evil private sector” story about services in the public eye, so any mistakes can rapidly spiral into headline news stories. And try building a good reputation while you attempt to collect the BBC licence fee or manage traffic wardens, as Capita does. And it’s only getting worse. Now that the Labour party under Jeremy Corbyn has decreed that both Tony Blair and Gordon Brown were in fact Tory prime ministers, there is no ideological backing for outsourcing at all on that side of the political fence. As for Theresa May, outsourcers are just another in a long line of headaches she doesn’t have a lot of time to worry about.

It’s not easy to turn around a company at the best of times. Doing it when politicians are competing with one another to be more outraged than the next is even harder, as Lionel Laurent points out on Bloomberg. In short, Capita is probably not going to end up going the same way as Carillion. But that’s not exactly a ringing endorsement. And it’s certainly no reason to buy.

https://moneyweek.com/capita-profit-warning-not-one-for-your-buy-list/?utm_campaign=money-morning-newsletter&utm_medium=email&utm_source=newsletter

I thought capita were issuing some figures today.

StockMarketWire.com
Capita launched a £701m rights issue to repair its balance sheet as losses continued to widen in the year to end of December.

The rights issue was said to form a key component of a transformation plan to 'provide Capita with a sustainable capital base to support its clients and operations.'

The proceeds of the rights issue will used to support the delivery of Capita's new strategy, support further investments in the business and reduce the firm's debt load to a target leverage ratio of between 1.0x and 2.0x adjusted net debt to adjusted EBITDA, Capita added.

'Capita is targeting annualised initial cost savings of £175m by the end of 2020. The successful implementation of the new strategy is expected to generate at least £200m of sustainable annual, post-tax free cash flow in 2020,' Capita said.

Capita's reported losses before tax widened to £513.1m from £89.8m a year ago, while underlying profit was up 43% to £383m.

Performance was impacted by £850.7m of specific non-underlying items, including £551.6m goodwill impairment and a number of other asset impairments and provisions, Capita said.

The firm said it continues to expect that its underlying pre-tax profits, before significant new contracts, restructuring costs and implementation costs of the strategy, will be between £270m and £300m for the year ending 31 December 2018.

Reported revenue decreased by 3.1% to £4,234.6m from £4,368.6m while underlying revenue decreased by 4.3% to £4,167.9m from £4,357.3m.

Underlying revenue on a like for like basis, excluding results from businesses exited in both years, decreased by 0.6% which included a 1.5% organic decline and 0.9% growth from acquisitions.

Net debt increased to £1,117.0m from £1,778.8m while adjusted net debt fell to £1,219.4m from £1,809.3m. Story provided by StockMarketWire.com

Ooo-er....Down 7% DYOR, Dividend scrapped, sp 150p, despite Fundraising of £700m and disposals of £400m ( but disposal is a zero-gain IMHO, since it reduces the ability to make profits.... otherwise why would anyone buy the Asset? ). New strategy and finance spending . . . no wonder the sp has taken a dive from ~£13 peak mid 2015 ( lowest sp this year May 2018=120p -DYOR ).
It doesn't look good as almost any hiccup will bash the sp - as I'm guessing many Institutions were buying for the regular dividend from managing Government Works, Etc.