The next Carillion? Shares in outsourcing firm Capita plunge 40% after profit warning

London, CityJohn Sibley, Reuters

• Shares in outsourcing firm Capita plunge 30% on Wednesday morning.
• Fall comes after the FTSE 250-listed firm issued a profit warning, announced plans for a rights issue, and suspended its dividend in a single announcement.
• “Today, Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility,” the firm’s CEO Jonathan Lewis said in a surprisingly frank statement.
• Capita, like Carillion, which collapsed earlier in January, has numerous government contracts.

LONDON — Capita, an outsourcing firm with a substantial involvement in government contracts, has seen its shares plunge almost 30% on Wednesday morning after the FTSE 250-listed firm issued a profit warning, announced plans for a rights issue, and suspended its dividend in a single announcement.

Described by the company in an announcement to the stock market as a “multi-year transformation programme” Capita said the announcements are part of a plan to fix the firms issues after it “underinvested in the business,” and placed “too much emphasis on acquisitions to drive growth.”

“Capita has underinvested in the business and there has been too much emphasis on acquisitions to drive growth. As our markets have evolved, the Group has not responded consistently to new customer demand,” Jonathan Lewis, Capita’s CEO said in a surprisingly frank statement.

“Since December, we have continued to experience delays in decision making and weakness in new sales.

“Today, Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility.

“Capita needs to change its approach.”

Shares are selling off aggressively during early trading. Around an hour after the open, shares are down more than 40%, as the chart below illustrates:

Markets Insider

Less than a month after the collapse of Carillion, Capita’s bad news is likely to be a source of worry for the government as the firm is involved in many of the same business areas, and has numerous contracts with the central government.

Among Capita’s contracts are administering the pensions of Britain’s teachers, working with the Cabinet Office, running the UK’s electronic tagging service for criminals on behalf the Ministry of Justice, and running numerous helplines for the Department for Work and Pensions.

“Following the recent demise of Carillion, and with Capita also highly exposed to government contracts (Army on-boarding, Teachers pensions, Pensions regulator, HSE, DWP, Cabinet office, MoJ and many more), 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,” Mike Van Dulken, head of research at Accendo Markets said in an email.

“Too complex, too diverse and just haemorrhaging cash – no we’re not talking about Carillion, but fellow outsourcer in a spot of bother, Capita,” Neil Wilson, senior market analyst at ETX Capital added.