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Outsourcing giant, Capita, lost more than a third from its share value this week after posting a new profit warning.
Shares plunged 38 per cent, to less than 77p, taking the stock to its lowest price this century. Lowering the firm’s 2020 cash flow target to £160 million from the previous £200 million guidance, CEO John Lewis said that the turnaround plan was turning out to be more complex than originally thought.
The 36-year old firm, which provides staff in its cleaning, HR and IT outsourcing divisions, among others, admitted it would have to spend an additional £170 million on restructuring taking the total cost of the turnaround plan to £890 million.
Capita reported a loss of £62.6 million for 2019, while adjusted net debt rose from £466 million a year ago to £791 million. It is a far cry from the dizzy heights of 2015, when the outsourcing giant’s stock was worth 800p and investors are likely to be concerned about the ballooning costs and lengthening timescales of Lewis’s much vaunted turnaround plan.
So, what is the prognosis for Capita – does it still have time to turn things around?
Its share price picked up last year, getting close to 100p again but this latest slide has more than wiped out those gains. Capita, which employs 63,000 people, announced earlier in the year that it is looking to sell off some of its non-core businesses including translation and event management services, which could boost its balance sheet.
Analysts had mixed reactions – Numis were pragmatic, saying they expected further exceptional costs but that the lowered guidance remained within their forecasts. Michael Hewson at CMC Markets said: “With the economic uncertainty coming down the pipe, it’s going to limit their room for manoeuvre. If it’s already cost them more now, how much is it going to cost them going forward?”
Peel Hunt also cut their underlying profit forecasts for 2020 from £325.4m to £214.4m, saying the latest results would lead to ‘material downgrades.’
When the shares were down just 15 per cent, Lewis described the market reaction as “an overreaction, quite frankly” and added that “significant progress” had been made with the transformation plan.
He said:” We have continued to simplify and strengthen the business, fix legacy issues, rebuild trust with clients, take out cost, reduce risk, and invest in our growth capability.”
He has stated that his long-term aim is to take Capita from a portfolio of independently run businesses to an integrated company, and its worth noting that in his two years at the helm, Lewis has met some key turnaround targets including cumulative cost savings of £175m over that time.
Whether investors have the patience to wait for the turnaround plan to yield its full benefits remains to be seen but this week’s share price crash could be a worrying sign.
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