Capita slumps again as analysts weigh in after profit warning

Capita slumped for the second day in a row as analysts weighed in following another profit warning from the outsourcer on Thursday.

The company said it now expects profit of at least £515m this year, down from previous guidance of £535m to £555m in September, which was in itself a downgrade.

Capita also announced that it was selling its asset management services arm, Capita Asset Services

Stifel downgraded is stance on the stock to ‘hold’ from ‘buy’ and cut the price target to 500p from 670p, saying the big drop in the bid pipeline, from £5.1bn in July 2016 to just £3.8bn – a six-year low – took it by surprise.

The bank said there had been concerns over earnings and the balance sheet ahead of the update, and it had hoped the company would announce a placing for the balance sheet, but instead has decided to sell its “crown jewels”, Asset Services.

“This is a high growth, high margin segment. At the FY15 prelims the virtues of this business were singled out and lauded. The rationale now is that it doesn't fit the strategy to be a more focused tech enabled BPO business,” Stifel said.

Stifel added that it has concerns about strategy and leadership. “Leadership matters and we have no confidence in management delivering.”

Meanwhile, Barclays slashed its price target on the equalweight-rated stock to 525p from 1,100p.

Barclays also reckoned the company was “selling the wrong bit”.

“We find the strategic rationale for selling Asset Services particularly underwhelming. It appears to be a fire sale of one of their highest quality businesses which is seen as preferable to an equity raise or a dividend cut.

“Fortunately, it is a good asset and they should get a good price for it, with a clean exit. But management credibility is now on the line and investors may speculate on possible management change next year. This carries additional uncertainty,” it said.

The bank said a near-term re-rating of the stock is unlikely until growth stabilises and the strategic fog clears, neither of which is likely for another six months.

Shore Capital downgraded its estimates on the stock following the warning, keeping the rating at ‘sell’.

The brokerage cut its FY2017 adjusted earnings per share forecast to 50p from 63p.

“We focus upon the strategy from the company which we believe prioritises maintaining the dividend - through selling assets to reduce debt and build balance sheet reserves. However, our model suggests that free cash flow available for strategic development and debt reduction post the dividend payment is set to remain under pressure.”

Capita shares fell sharply in early trade but by 1030 GMT, had pared losses to trade down a more modest 2.2% to 474.60p.