Capita's Pain May Help It Avoid Carillion's Fate: Street Wrap

Capita Plc’s new Chief Executive provided a bleak assessment of the outsourcer’s present problems as he suspended its dividend and announced a rights issue. Shares fell as much as 45 percent Wednesday, to the lowest in more than 15 years, and dragged down peers Babcock International Group Plc and Serco Group Plc. Yet taking these painful decisions now may help prevent Capita from becoming the next Carillion Plc, CMC Markets analyst David Madden said.

Earnings estimates will plunge and the market environment remains tough, but by selling assets and raising the capital it needs, the company could get back on the road to recovery, according to analysts.

CMC Markets, David Madden

Some investors will view the update as “reminiscent of Carillion as both companies have government contracts,” but while Carillion collapsed, Capita is “still in the game.”

“Servicing a relatively high level of debt and nursing a large pension deficit is the main issue here, but if Capita can trim down its liabilities and focus on a handful of profitable businesses it could turn itself around.”

Stifel, Caroline de la Soujeole

(Hold, PT 415p)

“Our initial take is that whilst this will be a painful process for Capita’s shareholders in the short term, the steps announced by the company this morning are necessary to ensure the long-term viability of the group.”

Peel Hunt, Christopher Bamberry

(Hold, PT 391p)

“The focusing of the group on a smaller number of better competitively positioned business, with a strengthened balance sheet, allowing appropriate levels of investment, are welcome steps in the right direction.”

Jefferies, Kean Marden

(Buy, PT 750p)

Initial calculations indicate 2018 earnings per share estimates could fall by around 40%, once analysts have included the rights issue and bonus factor adjustments in numbers.

New CEO Jonathan Lewis “kitchen sinks”, issuing a “stark initial assessment” of Capita’s shortcomings. The plan echoes similar steps by Serco Group Plc, Mitie Group Plc and Amec Foster Wheeler Plc.

UBS, Rory McKenzie

(Neutral rating, PT 400p both placed under review)

Trading in second half of 2017 in line with expectations, but customer attrition was higher than expected, more one-off benefits in base for earnings need to drop out, market environment is weak and costs are rising.

“2018 was always going to be a significant transition year for Capita,” but the update demonstrates the scale of the challenges which lie ahead.

— With assistance by Joe Easton, and James Cone

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