23rd Apr 2018 13:52
LONDON (Alliance News) - Capita PLC shares were higher on Monday after it announced a heavily discounted cash-call, with investors seemingly hoping its new chief executive can revive the troubled outsourcer's fortunes.
Capita shares were up 12% at 178.35 pence, the best midcap performer on Monday.
However, earlier this month the stock sank to a 20-year low of 127.60p, and shares in the firm are down 56% in the year-to-date.
The group offers business and support services to private as well as public sector clients, notably seeing its contract to manage television licensing for the BBC renewed last week, and is also one of the largest pension administrators in the UK.
In January, Capita said that it would suspend dividend payments, dispose of non-core assets, and raise GBP700 million via a rights issue of new shares under a multi-year business restructuring programme. The announcement saw almost GBP1.00 billion wiped off its total market value.
The restructuring would a reduction in entail general and administrative expenses, centralising procurement functions and also increased use of off-shoring processes and automation.
"Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility," newly appointed Chief Executive Officer Jonathan Lewis said at the time.
Lewis was appointed in October 2017 from oilfield services Amec Foster Wheeler PLC where he was chief executive prior to its merger with peer John Wood Group PLC. He assumed the top job at Capita in December and embarked on an ambitious plan to overhaul the business.
Lewis added that significant change would be required for Capita's next stage of development with the company too widely spread across multiple markets and has not evolved and responded to changing customer demands.
Capita on Monday followed through on its pledges as it proposed to raise GBP701.0 million through a rights issue, in line with its plan to simplify the business and bolster its balance sheet.
The rights issue will involve three new shares for each two already held. The fully underwritten issue of 1.00 billion shares will be at a price of 70.0 pence each, reflecting a 56% discount to the stock's closing price of 159.8 pence on Friday. It is also at a 34% discount to the theoretical price the shares should trade at after the rights issue.
"A theoretical ex rights price of 106p emerges, though we balance in our thoughts relief of the transaction being completed by a potential overhang of stock from investors concerned over the potential likely (in our opinion) extended recovery of Capita," said Shore Capital.
Although, due to the level of debt and bleak short-term outlook, Capita has not recommended the payment of a final dividend, leaving a total dividend for 2017 of 11.1 pence per share, down 65% from 31.7p in 2016.
"The new cash will be used to pay down debt as well as investing in new technology, and overhaul the company from top to bottom. Only last week the company renewed its contract with the BBC to collect the licence fee so while this week's loss doesn't make for pleasant reading today's announcement does appear to suggest that management have a turnaround plan that might work, and the confidence of shareholders in pulling it off," CMC Market analyst Michael Hewson said.
Proceeds from the issue will go towards supporting the delivery of the group's new strategy, investing further in the business, and reducing its debt to achieve a target leverage ratio of between 1.0 times to 2.0 times of adjusted net debt to earnings before interest, tax, depreciation and amortisation.
"Key to the share price advance is investor relief that a GBP701 million rights issue is fully underwritten, meaning various investment banks have guaranteed to take any of the new stock unwanted by shareholders, so there isn't any doubt that it won't raise all the desired money," said AJ Bell's Russ Mould.
The group is also targeting cost savings of GBP175.0 million by the end of 2020, as well a double-digit Ebit within three years.
Currently, Capita is expecting underlying pretax profit for 2018 to be in the range of GBP270 million and GBP300 million, down from GBP383.0 million in 2017 as contract and volume attrition as well as increased cost items are expected to beat out cost savings and new business wins.
Shore said its current underlying pretax profit forecast for 2018 stands at GBP275 million.
Capita also on Monday, having been expected to report annual results on Thursday, said for 2017 - under the new International Financial Reporting Standard 15 reporting rules - its pretax loss widened significantly to GBP513.1 million from GBP89.8 million.
This was as revenue that dropped to GBP4.23 billion from GBP4.37 billion the year before. The company recorded a GBP551.60 million impairment of goodwill in the period, coming from attrition and contract terminations.
Capita said underlying revenue fell by 4% due to weakness in real estate and central government services, but was partially offset by growth in its Department for Work and Pensions personal independence payment assessments and DCC Smart Metering contracts.
Revenue was also hurt by cost overrun on a contract with the National Health Service to deliver primary care support services.
"The majority of our contracts are performing well but we continue to face challenges in our NHS Primary Care Support England contract. NHS PCSE has improved operationally during the year and we continue to drive improvements across the service in conjunction with stakeholders and NHSE, but we have had to invest in the service in order to achieve this and the cash cost of recovering performance has been high," the company said.
Capita also said trading in the first quarter was in line with its full year guidance.
Shore said Capita's outlook statement remains negative in terms of the impact of the restructuring and current operating environment.
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