Carillion comparisons drawn as Capita issues shock profits warning

05 February 2018 6 min. read
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The shares of professional services firm Capita have hit a 15-year low, following a shock profits warning. The major UK outsourcing group provides services for a number of key public sector partners, including the Ministry of Justice, the Department of Work and Pensions, and the UK Pensions Regulator.

Major UK outsourcing group Capita has sent its shares into free fall, as the City of London was left stunned by the firm’s profits warning. The professional services firm had already seen its share price crash by 14% at the end of a turbulent 2017, amid concerns of rising competition and a fall in its number of big ticket contracts. The drop came despite Capita winning several high profile governmental and private sector contracts throughout the year, as fears of a tightened post-Brexit market began to manifest.

Now, the firm’s new CEO has taken the decision to freeze its shareholder dividend, while admitting that Capita had become “too complex” and lacking in discipline for an easy reversal of fortunes. Jonathan Lewis, who took over as chief executive in December, said the company needed to raise up to £700 million through a cash call on shareholders, as well as via the scrapping of dividend pay-outs, and the sale of all non-core parts of the business. 

Capita’s new boss unveiled the radical overhaul of the group’s finances, in a bid to rebalance debts of roughly £1.15 billion – including a £381 million pension deficit – and reduce the risk of unemployment to as many as 50,000 UK staff. The group also warned that underlying profits in 2018 were now likely to be between £270 million and £300 million, well below the £406 million previously predicted by City analysts. 

Carillion comparisons drawn as Capita issues shock profits warning

The news was greeted by a devastating slide in the firm’s stock. Shares in Capita tumbled by over 40%, hitting a 15-year low, as traders recoiled from what many have been projecting will soon become the “new” Carillion.

Carillion parallels

Following the alarming news of Capita’s decline, numerous comparisons have inevitably been drawn with the collapse of Carillion – another major supplier of public services which failed at the beginning of the year. Despite issuing multiple profit warnings and being burdened with around £1.5 billion in debt, the Wolverhampton headquartered company was handed multiple Government contracts before its ultimate demise. 

As well working on keystone projects including the HS2 railway, according to Carillion’s website, the outsourcer was also “one of the largest providers of facilities management to the NHS”, employing about 8,000 people in the healthcare division, while managing 200 operating theatres, with 300 critical-care beds and just under 11,500 in-patient beds. As the NHS has come under increasing strain in recent years, Carillion’s failure could cause a crisis within the vital public institution. 

Capita, which is also among the 30 top performing IT outsourcers in the UK, likewise counts the UK government among its major clients. Despite its well-publicised woes, the company recently landed a lucrative contract to administrate the Royal Mail pension fund, adding to contracts that include running London’s congestion charge scheme, tagging prisoners, operating the jobseeker’s allowance helpline and administering the teachers’ pension scheme. It also manages the licence fee for the BBC. 

The firms also share common auditors. KPMG have since come under scrutiny for their role in Carillion’s failure, and will be the subject of an investigation by the Financial Reporting Council, to see if the Big Four firm breached auditing criteria. Now, the firm look likely to be the subject of further ire, having become auditors for Capita in 2010, after the outsourcers decided to walk away from Big Four competitors EY, which had audited the company since its initial listing in 1984, after a competitive review. 

The Work and Pensions Committee opened an investigation into the Carillion saga two weeks ago, and commenting on the new case of Capita, the Committee’s Chair, Frank Field MP, noted, “Another day, another outsourcing firm with massive debt, a huge pension deficit, a KPMG audit and the Big Four popping up at every turn in the company’s chequered history. Sadly, Capita goes on the growing list of firms we are investigating to see if their conduct has endangered current and future pensioners’ rights.” 

The Government themselves were keen to dismiss comparisons however. A spokesperson for Prime Minister Theresa May commented, “Broadly we monitor the financial health of all our strategic suppliers, including Capita, and we are in regular discussions with them regarding their financial position.” The source added, “And (I would like) to emphasise we do not believe that any of our strategic suppliers including Capita are in a comparable position to Carillion.”

Outsourcing market

While the beginning of the year saw experts at Information Services Group predict a bumper year of 20% growth for outsourcing, amid a talent-shortage relating to Brexit uncertainty and digital disruption, the outsourcing sector has seen a tumultuous opening to 2018. The sector was rocked by the collapse of construction giant Carillion in January, and Capita’s profits warning has compounded this by hitting shares in other outsourcing companies. While Capita slumped by 43%, Serco also saw a 3.9% fall; alongside Kier (-1.3%), G4S (-1.1%) and Interserve (-1.9%). This was particularly unhelpful for the beleaguered Interserve, as the cleaning-to-building group was already grappling with poor trading and climbing costs. 

The Reading-based group had seen shares tumble by more than 30% last year, following the firm’s suggestion that it might breach its banking covenants – as operating profit in the second half of the year was set to be around 50% lower than previously expected. Numerous reports have since emerged that construction-related professional services firm has appealed to City consultants to advise on their dire financial situation, and EY, PwC and Oliver Wyman have all now been tapped by either the company or its lenders.