Shares of Capita plummet 14% as business performance slows

18 December 2017 Authored by Consultancy.uk

Professional services firm Capita has seen its share price crash by 14% amid concerns of rising competition and a fall in its number of big ticket contracts. The drop comes in spite of winning several high profile governmental and private sector contracts in recent months, as fears of a tightened post-Brexit market begin to manifest.

Following a turbulent 2017, troubled outsourcing provider Capita faced further market woes as shares slid 14%, after the group warned of tough times ahead in a 'subdued' market. While sources at the firm – which has issued profit warnings this year – still expect underlying profits to rise in the second half of the year, the organisation also made it plain that major business had been sluggish throughout 2017, particularly in the public sector.

Earlier in Autumn, Capita was noted for its successful support of two local authorities, which it’s Local Government wing helped collect over £14 million more in council tax via digital innovation, although its service uptake has been limited to few major advances. Most notably, Capita added to its public sector portfolio, winning a new seven-year contract with the Cabinet Office to administer Royal Mail’s £47 billion Statutory Pension Scheme, made up of 400,000 deferred members and pension members. According to government documents, Capita will be paid £31 million for the eight-year deal, equating to £3.9 million a year.Capita shares plummet 14% as business slowsWhile at first glance this figure appears to be solid business for the firm, the government had previously spent an average of £5.2 million a year on administration costs for the scheme since 2013, according to Cabinet Office financial reports for the past four financial years. This implies firstly that the new arrangement could save the government more than £1 million a year, and secondly, that Capita’s negotiating position may have been significantly weakened by its market performance, forcing a significant mark-down in pricing as a result.

In the private sector, 2017 also saw little progress. Since the addition of a £70 million customer service contract for communication giants 3 to Capita’s portfolio last year, there has been little movement of note, beside the group extending a customer management contract with British Gas to April 2019. 

Volatile market

Compounding the concerns raised by this slow growth, Capita warned that it anticipated a higher level of ‘contract and volume attrition’ at its Private Sector Partnerships division over the course of 2018. Intensifying competition amid the professional services sector – thanks to new challengers leveraging innovative digital technology – along with a general tightening of belts among clients, bracing for Brexit, have impacted the firm’s plans for next year, already.

The UK defence budget is one area facing major cuts thanks to the UK’s lethargic economic performance – with slower growth than expected decimating £26 billion put aside for a smooth Brexit transition. As the government’s Brexit efforts continue to flounder, the Ministry of Defence reportedly faces a £30 billion shortfall, after Chancellor Philip Hammond was forced to retool his November budget. According to Capita, despite “encouraging progress” at its public sector division, a £22 million defence contract will not recur next year – which likely relates to the government’s need to find savings in defence.

Capita’s IT services division did see some improvement, thanks to cost cutting exercises. However, the group said it still expected profits of the division to decrease slightly for the second half of the year than the first, as a result of a further non-recurrence of a £9 million one-off supplier settlement.

New Chief Executive Jonathan Lewis, who arrived at Capita this month to replace Andy Parker, stated that he aimed to “focus the business and allocation of capital and resources on the markets which offer the best growth prospects.” However, such comments seem to have done little to allay the fears of investors. Following their trade update, Capita’s continued fall in stock value accelerated by a further 13.6% in early trading in London’s Stock Exchange, bringing the year-to-date decline to almost 25%, according to Reuters data. The firm’s overall decline now languishes at a fall of 68% over the past two-and-a-half years.

Top firms in the UK’s professional services industry have seen profits slow over the past year, according to the latest research. A recent study from the MCA revealed that the consulting industry in Britain in particular seeing dawdling growth, compared to its European competitors, as businesses prepared to deal with the realities of a post-EU UK.

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