Capita shares have tumbled more than a third: This is how the City is reacting

 
Caitlin Morrison
Follow Caitlin
Inside The City Of London's New Landmark Skyscraper
City analysts drew comparisons between Capita and Carillion (Source: Getty)

Outsourcing giant Capita announced the suspension of its dividend as part of a transformation plan this morning - and shares duly plunged by more than 40 per cent.

The group has been struggling with a subdued market for some time now: former boss Andy Parker stood down last year after revealing a 33 per cent drop in profits in 2016.

Today, Capita said it would suspend its divi until the group is generating sustainable free cash flow, and announced a raft of transformation measures, including a rights issue and several non-core disposals.

Shares in Capita were down 45 per cent at the time of writing.

This is how City analysts reacted:

"In terms of updates, the latest from just-through-the-door Capita CEO Jonathon Lewis is about as ugly as it gets," said Mike van Dulken, head of research at Accendo Markets.

"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."

Carillion comparisons

The inevitable comparisons with recently-collapsed Carillion were drawn - van Dulken noted that "following the recent demise of Carillion, and with Capita also highly exposed to government contracts... 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". This will be heightened by the fact that the FTSE350 this morning is "being footed by a who’s who of outsourcers": shares in Serco, Babcock, Mitie and Kier were all down in early trading.

Connor Campbell at Spreadex said Capita's gloomy update was a key contributor to the FTSE's dip this morning: "While the company isn’t actually part of the FTSE 100, Capita’s 35 per cent plunge following its bad news hat-trick – profit warning, dividend suspension, £700m cash call – seems to be informing the index’s early decline, especially since it comes so soon after the Carillion collapse."

Analysts at Shore Capital said they welcomed the news that Capita plans to make serious changes, however, they added that the group "still faces significant challenges in its core UK market on contract pricing and with continuing hiatus in public sector services", and maintained their "sell" recommendation on the stock.

Related articles