Capita dives despite making progress in first half, results 'difficult to read'

Capita reported a mixed set of results for the first six months of the year but said underlying profits would "rise modestly" in the second half compared to the first, though some investors and analysts found the numbers rather disappointing and difficult to decode.

The FTSE 250 group's bid pipeline shrank to £3.1bn from the £3.8bn in March, with £403m of major contract wins in the period, which is less than half the same period last year as the contract win rate fell to 1-in-2 from 1-in-3.

Interim chief executive Nick Greatorex, temporarily taking extra responsibilities alongside his role as finance director after CEO Andy Parker resigned in the spring, said: “In the first half of 2017, we made good progress on executing the plans laid out at the end of last year to reposition the group: we announced the sale of our Asset Services businesses, completed the disposal of our specialist recruitment business and commenced a number of cost initiatives.

"We remain confident that these actions are making Capita a simpler business, well positioned for the future under new leadership."

With reported revenue shrinking 1% to £2.13bn and underlying revenue down 3% to £2.07bn, underlying profit before tax increased 46% to £195m and underlying earnings per share was up 42% to 22.92p, though this was boosted by a one-off payment from the Ministry of Defence to buy out of a contract that was meant to last to 2024.

At the reported level profit before tax shrank 25% to £27.6m, with £67.6m of business exit costs and £99.8m of amortisation and settlements from the Asset Services sale.

Full year pre-tax profits will be supported by cost saving initiatives, which are expected to produce a net benefit of £57m by the end of next year, but Greatorex expects less benefit in the current year and said some trading businesses were "not improving as quickly as expected".

UNEVEN DIVISIONS

Private sector partnerships generated a 6% increase in underlying revenue and saw profitability improve, while public services partnership revenue fell by 6% due to weakness in central government services and real estate, which is not recovering as quickly as expected.

Underlying public service profits increased as a result of the Transport for London contract that went live in last year, helped by the buyout of the MoD's Defence Infrastructure Organisation contract, lower costs on NHS Primary Care Support England and a good performance from our Department of Worl and Pensions contract.

In professional services, underlying revenue fell 29% as a result of the disposal of the specialist recruitment unit and like-for-like revenue fell 4% due to the loss of part a contract, which was partially offset by growth in the Army Recruiting Partnering Project, with underlying profits increased due to costs reducing and growth in some contracts.

The Digital & Software Solutions business saw underlying revenue fall 1% and underlying profits by 13%, as a result of two major long-term active software licences ending in the previous year. "We are making good progress on the offshoring of development work to enhance capability and efficiency," Capita said.

In IT services underlying revenue increased 14% due to the acquisitions of Trustmarque and Acutest and increased volumes in network solutions. Underlying profits doubled, following the restructuring in the prior year.

The board maintained the interim dividend at 11.1p and said net debts was down to £1.6bn from £1.9bn a year before.

Later in the day the company was informed it should prepare for industrial action at several sites after unions voted to strike over pension proposals.

MARKET REACTION

Capita shares tanked more than 10% on Thursday, dropping below 560p for the first time since June, but edging higher just before the close.

"Numbers look disappointing and are difficult to read," said Morgan Stanley analyst Toby Reeks, with sales and operating profits 5% short of his team's expectations, with PBT and EPS 3% short.

"It also appears to have received a one-off £16m from being bought out of the DIO contract early; assuming this is the case would imply PBT of £179m," 11% below his forecasts.

"Forward looking metrics are also weak," Reeks said, with contract wins down and nearly all being renewals and the pipeline also down, with average contract length slipping to 5.5 years from seven in March.

Net debt was a positive for Reeks, with Capita expecting to beat the bottom of 2-2.5 leverage prior to IFRS 15.

Analyst Neil Wilson at ETX Capital said Capita's efforts to try and become a simpler business are "clearly taking time" and the early adoption of IFRS 15 and restating last year’s revenues are making the picture look "even muddier", with revenues down 3% on an underlying basis, underlying profits soaring, reported profits sinking and a loss per share of 0.11p versus reported earnings per share of 4.66p last year.

"Cost cutting is on track to produce £57m of savings by the end of 2018, although most of this won’t be felt in the 2017 numbers. And growth is not expected to come until 2018. Today’s interims confirm investors will be waiting a little longer for growth and for a new CEO, but it does look on track.”

Nevertheless, he said there were several positive elements, including net debts coming down fast. "This means leverage is being pushed back down to x2 earnings from closer to x3 recently.

"Second, the contract win rate has climbed back to one in two, having slipped to a less-than-impressive one in three last year. That said, Capita reports £403m of major contract wins – half the £879m in H1 2016.

"Free cash is down but at circa £180m means the dividend remains well covered."