Shares in UK government contractor Capita plunge 40% after profit warning

Shares in government contractor Capita plunged 40% after it issued a shock profits warning and suspended its dividend payments just weeks after the collapse of construction firm Carillion.

In the latest blow to the outsourcing sector, Capita’s new boss unveiled a radical overhaul of the group’s finances, giving a damning assessment of a company that he said had become “too complex” and lacking in discipline.

Jonathan Lewis, who took over as chief executive in December, said the company needed to raise up to £700m through a cash call on shareholders, scrap dividend payouts, and sell non-core parts of the business

Capita counts the government among its major clients with contracts that include running London’s congestion charge scheme, tagging prisoners, operating the Jobseekers Allowance helpline and administering the teachers’ pension scheme. It also manages the licence fee for the BBC. The group has debts of about £1.15bn and employs about 70,000 people in the UK.

The group warned underlying profits in 2018 were likely to be between £270m and £300m, well below the £406m predicted by City analysts.

The measures are likely to be interpreted as pre-emptive action by Capita to ensure a profitable future at a challenging time for the outsourcing industry, signalled by Carillion’s collapse.

Lewis conceded there were some “tough messages” from the company, but insisted the plans announced were the “first steps in the road to recovery.”

He said the turnaround of the business would take at least two years and the group sought to address some of the mistakes of the past, including underinvestment in infrastructure and too many acquisitions.

“We are now too widely spread across multiple markets and services, making it more challenging to maintain a competitive advantage in every business and to deliver world class services to our clients every time.

“Today, Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility. [It] needs to change its approach.

“Cost savings and non-core disposals alone will not be enough. We have also taken the significant decision to suspend the dividend and seek equity.”

Capita said it was undertaking a triennial review of its pension scheme and expected its pension deficit to come in below the £381m announced last summer.

Former rival Carillion has faced criticism for continuing to pay dividends and big executive salaries as debts mounted and eventually led to a collapse of the company earlier this month.

“Too complex, too diverse and just haemorrhaging cash – no we’re not talking about Carillion, but fellow outsourcer in a spot of bother, Capita,” said Neil Wilson, analyst at ETX Capital. “New chief executive Jonathan Lewis is having a proper clear out to fix the business before it heads the way of its erstwhile peer.”