Capita crashes on profit warning as clients dillydally

Capita warned that full year profits will be some way short of current forecasts after its third quarter was hit by a slowdown in some areas, one off costs and recent hesitation among clients.

The FTSE 100 business process outsourcing group said revenues would grow 4-5% in the calendar year and that underlying profit before tax would be between £535m and £555m, 5-9% short of last year and 10-13% shy of current City forecasts.

Having in July expected organic revenue growth of around 4% for the full year, it is now expected to be nearer 1% with operational gearing resulting in substantial slowdown, and could be even worse if it does not successfully resolve its contract dispute with the Co-op Bank.

Capita said the performance so far in the second half of the year, which coincides with some economic uncertainty around the Brexit referendum decision, has been affected by "a slow-down in specific trading businesses, one-off costs incurred on the Transport for London (TfL) congestion charging contract and continued delays in client decision making".

The slowdown was in the technology reseller stream of its enterprise services division, where the company has cut profit expectations roughly £30m and has already taken steps to reduce the cost base in order benefit 2017, while the software asset services division has continued to see less activity following the EU referendum.

There will be £20-25m of one-off costs for the TfL contract, which will be included in underlying results this year only, while the contract dispute with Co-op Bank over obligations relating to the transformation of services carries "a risk of litigation", the company said, though this could fall next year.

Delays in client decision making has affected the converting of contracts in the pipeline into revenue, though the group confirmed £949m of major contract wins in the year to date.

Capita also said net debt was likely to rise to 2.7 times EBITDA at year-end, with net debt at a similar level to June, up from a ratio of 2.49 at the half year.

Broker Shore Capital said these continued delays were the most significant in its view: "We see this as the effects of hiatus from the Brexit referendum – likely continuing for several quarters yet, in our view."

RBC Capital Markets said: "not only is growth in H2 much weaker than expected, but the outlook into 2017 is clearly much weaker, there are contract issues, and the market’s concerns re the debt position will re-emerge. Management credibility will also take a big hit – this is a huge downgrade only two months after H1 results."

Shares in Capita crashed 30% to 666p bt 0925 BST, their lowest level in over four years.