EXTRA: Capita Shares Fall As Underperforming Divisions Weigh On Profit

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LONDON (Alliance News) - Outsourced services provider Capita PLC said profit fell in the first half of the year as revenue was hit by the loss of part of a major contract, and weakness in real estate and central government services, though profit rose on an underlying basis.

Shares in Capita were down 11% Thursday at 573.42 pence, by far the worst performer in the FTSE 250.

Underlying pretax profit rose 46% to GBP195 million from GBP134 million. However, reported pretax profit fell 26% to GBP28 million from GBP37 million. Capita said underlying revenue for the half year to June 30 slipped to GBP2.07 billion from GBP2.13 billion.

Several divisions performed below expectations, with the Digital & Software Solutions division's profit falling by 13% due to major licences ending.

Total administrative costs contributed to the decline in profit, and for the period rose to GBP490.7 million compared to the previous year's GBP394.1 million, related to the disposal of various businesses.

During the period the company adopted the new accounting standard IFRS 15 from January 1, with this year's results reported under the new standard, with 2016 being under the old.

One of the main impacts, Capita said, will be the potential for lower profit or losses being reported in early years of contracts where there are significant upfront costs.

Revenue benefited from new contracts with Tesco Mobile and mobilcom-debital, continued expansion of Department for Work and Pensions PIP assessments, and increase in BBC TV Licensing revenue after contract modification and improved performance in network solutions and other IT businesses.

Its revenue mix for the half was 71% long term contractual, 16% short term, and 13% transactional.

The company said it concluded discussions with the UK Ministry of Defence in relation to the Defence Infrastructure Organisation. Capita said it now expects its contract with the DIO to end in 2019. It said first-half results include a GBP16 million benefit from the reshaping of the DIO contract, which is not expected to recur next year, nor in the second half of this year.

Capita said it is still in discussions with a major life and pensions client which may lead to continuation of the contract on different terms or the termination of the contract. However, the company's revenue was affected by the loss of part of the Civil Service Learning contract.

Its service delivery across its NHS Primary Care Support England contract has continued to improve, Capita said, but the company is still addressing "a number" of issues. It is continuing to invest in completing the transformation of this service prior to an inflection point in profitability being achieved.

Capita said it made good progress over the period on executing its plans to reposition the company. It announced the sale of its Asset Services businesses, completed the sale of its specialist recruitment business, and commenced "a number" of cost initiatives.

Asset Services is to be disposed of for GBP888.0 million to Link Group Inc, with the deal expected to be completed in the fourth quarter of 2017, while its recruitment business was sold to Endless during the period.

Following the receipt of proceeds from the disposal of Asset Services and expected cash flow in the second half, Capita said it expects leverage to fall to around the bottom of its 2-2.5x range at the end of 2017.

Capita said it has begun both short- and long-term cost saving initiatives, including reductions in overheads, the offshoring of some IT applications support, centralising procurement, and rationalising its property estate. It expects the net benefit of these savings to be around GBP57 million by the end of 2018.

It made two "small" acquisitions in the first half of the year. It acquired software testing services provider Acutest and NYS Corporate, a travel management business. The aggregate consideration for these two acquisitions was GBP10.0 million, excluding deferred and contingent consideration.

Over the period Capita said its win rate improved in a "quiet" market, with GBP403 million of major contract wins, which was less than half of the figure recorded in 2016, GBP879 million. However, Capita's major contract win rate was one in two for the year compared to last year's one in three.

Capita said its bid pipeline currently stands at GBP3.1 billion compared to the figure recorded on March 31 of GBP3.8 billion, with a weighted average contract length of five and a half years.

The bid pipeline comprises of 28 bids including 79% new business and 21% renewals and extensions. Capita said it expects decisions on the majority of bids within 12 months and it continues to have a large, active prospect list of opportunities behind the pipeline.

Capita said its pension deficit increased to GBP381 million from GBP345 million for the year, reflecting a decrease in the discount rate. The latest triannual valuation commenced in April, with a GBP12.0 million increase expected in the IAS 19 pension charge this year and an increase in cash contributions in 2018.

Since the period end, Chief Executive Officer Andy Parker left the company on last Friday. Finance Director Nick Greatorex has been appointed interim CEO until a successor is found, with Greatorex combining his current role with that of interim CEO. Capita didn't provide an update Thursday on its search.

The company said it has consulted with the affected parties over the closure to future accrual of the benefit scheme, which will be replaced by a defined contribution scheme for affected employees. Capita said it will provide an update on plans to close the financial deficit in due course.

Capita paid an interim dividend of 11.1 pence per share, unchanged from the same period the year before.

Looking ahead, Capita said it expects pretax profit to rise "modestly" in the second half compared to the first, supported by cost initiatives which will be partly offset by some businesses not improving as much as expected.

It said it remains confident actions taken since last year are making Capita a simpler company, well positioned for the future.

By George Collard; [email protected]

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