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Capita Drops Most in 15 Months on Margin Outlook: London Mover

July 25 (Bloomberg) -- Capita Plc, which provides services to the U.K. Justice ministry, declined the most in 15 months after saying that full-year operating margin would remain lower than last year “for the foreseeable future.”

The shares fell 3.9 percent to 996.5 pence in London trading, the biggest drop since April 2012, paring this year’s advance to 32 percent. The volume of shares traded was more than twice the three-month daily average and it was the third-worst performer in the FTSE 100 Index today.

“We expect medium- to long-term operating margin to be 12.5 percent to 13.5 percent,” Chief Executive Officer Paul Pindar said in a telephone interview. “You will see some variability around that.”

The reduced margin partly reflects costs associated with winning new business. A contract with Telefonica SA’s O2 unit in the U.K., worth 1.2 billion pounds, came into effect after the company incurred preparation expenses.

“Some costs are going through where we haven’t had any revenue,” Pindar said, adding the 4 billion-pound ($6.1 billion) life-long value of the contracts Capita won in the last nine months exceeded its revenue last year.

Operating Margin

The first-half underlying operating margin declined to 12.5 percent from 13.3 percent a year earlier, the London-based company said in a statement today. The operating margin fell to 14.1 percent last year from 14.6 percent, the company said at the time of its annual results.

“The key disappointment was the movement in operating margins,” Mike Allen, an analyst at Panmure Gordon & Co. who maintained his sell rating, said in a note to clients. “The margin decline has been greater than anticipated.”

Capita, the largest U.K. provider of outsourcing services, will review parts of its general insurance unit, given the challenges faced in some of the more competitive segments of the market, the company said in today’s statement.

That was a “pretty major reversal of strategy” for the company’s private sector business, Michael Donnelly, an analyst at Westhouse Securities Ltd. with a sell rating on the stock, said in a note to clients. “General insurance represents 4 percent of revenues and profits.”

The lower-than-expected guidance on margins is unlikely to affect consensus earnings estimates for this year, Mike Murphy an analyst at Numis Securities Ltd who cut his rating to hold from add on valuation grounds, said in a note to clients.

“It appears to be more a result of a mix issue and a return to growth investment rather than any margin squeeze,” Murphy said. “As such we do not see it as a negative and believe investors should focus on a return to good levels of organic growth.”

First-half revenue rose 13 percent to 1.82 billion pounds from a year earlier, Capita said in the statement. Underlying pretax profit increased 10 percent to 205.2 million pounds. Capita said it was on track for organic growth of at least 8 percent this year in addition to increased sales as a result of acquisitions. The company raised its first-half dividend 10 percent to 8.7 pence a share.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editor responsible for this story: Douglas Lytle at dlytle@bloomberg.net

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