Capita plunges again as boss quits

It took a while for the market to make up its mind, but half-an-hour into the trading session it was decided that chief executive Andy Parker's departure was not in fact good news. Neither was a huge slump in annual profits and profits downgrade, and investors aren't sticking around for what we're told will be a "transitional year" at struggling outsourcing business Capita. The shares are down 10%.

Capita has never really recovered from a savage profits warning last September which wiped out over half its value, plunging the shares to an 11-year low. And we had it confirmed last night that Capita has lost its place among the blue chips in the latest reshuffle.

Big fear here has been around a possible dividend cut or rights issue. Capita did at least keep the total payout unchanged at 31.7p, and the ongoing sale of the asset services and specialist recruitment businesses will help rebuild the balance sheet currently saddled with net debt of £1.78 billion.

Parker has been buying shares in the aftermath of the warning. So has star fund manager Neil Woodford. But Parker now says he'll leave the company later this year once a replacement is found.

Given Capita shares are currently worth much less than half the price they were when Parker took over from Paul Pindar in March 2014, one assumes his exit might be welcomed. But it's not quite that simple.

Underperformer

"Capita has underperformed in recent years and has proven somewhat opaque, and so new leadership is likely to help the market's perception of risk from a lack of transparency," writes JP Morgan Thursday. "However, a CEO change does increase the risk of a prolonged strategic review and potential for material write-downs."

Results for 2016 were largely in line with expectations. Underlying revenue was up 5% year-on-year and underlying pre-tax profit fell 19% to £475 million, giving earnings per share (EPS) of 56.7p.

However, chiefs warned of a likely £12 million increase in 2017 pension costs, which trims JP Morgan's underlying operating profit forecast by 2.4%. Excluding the pension charge, Capita expects 2017 will deliver "a similar trading performance to 2016".

"We expect 2017 to be a transitional year for the business, as we complete our disposals, bed down the structural changes inside the business, and re-position Capita for a return to growth in 2018," it said.

That's fair enough, but even a forward price/earnings (PE) ratio of less than nine and prospective dividend yield of 6.1% cannot tempt buyers Thursday. Unease around a replacement and a likely uninspiring trading performance are keeping them away.

"Our 466p target price reflects the on-going risk to forecasts, the reduced potential for M&A (which has made a material contribution to financial performance over many years) and the unfavourable mix shift post a successful disposal of Asset Services," explains Peel Hunt's Christopher Bamberry. "We remain wary of investing in Capita".

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