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Capita reveals extra profit impairments and gloomy outlook

By Oliver Haill

Date: Thursday 14 Dec 2017

Capita reveals extra profit impairments and gloomy outlook

(ShareCast News) - Capita said a number of extra restructuring and one off accounting charges will hit full year numbers, while a subdued market for public sector outsourcing contracts led to a fairly gloomy outlook.
The FTSE 250 company, which appointed ex-Amec boss Jon Lewis as chief executive in October, assured that it still expects underlying pre-tax profits to rise "modestly" in the second half of this year, before the inclusion of restructuring costs.

After bagging £471m of new deals in 2017 Capita's bid pipeline has a current value of £2.5bn and while a number of bid decisions are expected in the coming months, any resulting contracts are unlikely to be accretive to profits in 2018. This is largely due to the phasing of revenue and costs under the new IFRS 15 accounting regime, which spreads value out more evenly over a contract's lifetime.

Since the half year, a seven-year contract was won with the Cabinet Office to administer the Royal Mail Statutory Pension Scheme and a there was a contract extension to provide 'customer management' for British Gas out to April 2019.

Reported full year profit will be lifted by the significant gain on the disposal of the Capita Asset Services businesses but will be hit by the £66m settlement with the Financial Conduct Authority regarding the Connaught Income Series 1 Fund, a likely impairment from a contract with a major life and pensions client, £18m of cost reduction charges, and "a number" of asset write downs and impairments are to be taken in relation to past acquisitions.

Net debt is expected to be 2.3 times EBITDA at the end of the year, improving from the 2.9 ratio seen at the end of the last financial year, mostly thanks to the Asset Services sale.

Since the half year results, although market conditions have remained challenging, underlying trading across our divisions has been in line with our expectations.

Looking at Capita's different divisions, the private sector partnerships division is expected to provide good underlying profits growth, but management anticipate a higher level of contract and volume attrition to potentially weigh on performance in 2018.

Public services partnerships made "encouraging progress" and improved profitability, though a previously forecast contribution of around £22m from the Defence Infrastructure Organisation contract will not recur next year.

IT services costs were cut although profits are likely to be slightly lower in the second half compared to the first, while the Digital & Software Solutions arm faces lower profits after the end of two major software licences.

Professional services, where underlying revenue fell 29% in the first half, "has made steady progress" in line with expectations.

Analysts at Shore Capital noted that no value guidance was given on the magnitude of the total impact of various non-underlying items likely to hit profits, "which clearly might have reserves implications - though we don't expect an impact on the dividend stream".

"We see little positive in Capita's full year update this morning, with only 'thin' guidance for the likely performance of the group for FY2018F," was the pithy overview.

Capita's shares had fallen 11% to 414.98p after almost an hour's trading on Thursday.

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