In terms of updates, the latest from just-through-the-door Capita CEO Jonathon Lewis is about as ugly as it gets. That said, credit where credit’s due for getting it all out in the open, warts ‘n’ all. A worsening in trading since mid-December’s pre-close update, challenging sector trends and unavoidable headwinds mean a warning on 2018 profits. Then there’s admitting that the group is far too complex and thinly spread across multiple markets, unable to remain competitive as is. It’s also judged too short-termist and lacking in both operational discipline and financial flexibility. Not exactly solid foundations. In fact, some of the aforementioned ‘issues’ rather echo what we’ve heard from elsewhere in outsourcing land of late.

However, it’s more likely that the remedies identified to fix the ship are the real culprits of today’s share price plunge, with an attractive (but hitherto questionably sustainable) 6%+ yielding dividend suspended until positive and sustainable cash flow returns, a £700m rights issue (sure to be highly dilutive to strong-arm shareholder participation) planned to bolster the balance sheet and non-core disposals announced to simplify the group. Mr Lewis is going to have a busy 2018.

This will have been a painful update to release to the markets, and may well sting a while longer. However, it may yet prove a case of honesty being the best policy and short-term pain being necessary to ensure a successful turnaround and deliver long-term gains for loyal shareholders who’ve had it tough to say the least. In late 2015 the shares traded just shy of £13.5 all-time highs, at which point they began a rather rocky ride, with profits warnings aplenty and an 80%+ share price decline, to their lowest mid-2003. In fact the shares are still falling and could well challenge the £2 mark (-10% to Feb 2003 lows) before the day is out. Below that, it’s October 2002 lows of 160p, another 27% further south. Not for the faint hearted.

Following the recent demise of Carillion, and with Capita also highly exposed to government contracts (Army on-boarding, Teachers pensions, Pensions regulator, HSE, DWP, Cabinet office, MoJ and many more), investors will be quite rightly wondering whether the flood gates are steadily opening to cast light on the risks of government reliance on public-private partnership, especially with the this morning being footed by a who’s who of outsourcers: Capita -38%, Serco -3.75%, Babcock -3.2%, Mitie -2%, Kier -2%.

Mike van Dulken, Head of Research, 31 Jan 2018