Capita's spectacular crash

Mitie's warning last week meant the writing was on the wall for outsourcers. Still, Capita's own admission that a series of problems has hammered revenue growth and profits plunged its share price to a four-year low. Given the scale of some of the issues, a quick recovery seems unlikely.

We had concerns about Capita, responsible for large swathes of NHS admin, the London congestion charge and military recruitment, earlier this year when the shares were worth 1,078p.

Now, an awful start to the second half means organic revenue growth will shrink from previous estimates of 4% to just 1% in 2016. Underlying pre-tax profit forecasts for £614 million have been slashed to £535-£555 million. Full-year margin of 12.5% is also below management's 13-14% target and total sales are likely to grow 4-5%.

That's quite a downgrade, and is the result of a general business slowdown, one-off costs linked to its Transport for London (TfL) congestion charge contract and slow client decision making. Restructuring costs are not included in these downgraded numbers. We'll get more info at the next scheduled update in December.

Despite good profit growth in the first half of the year, a slowdown in its IT Enterprise Services and recruitment Workplace Services divisions will make £30 million less.

Although the Digital & Software Solutions business is doing well, post-referendum issues at Asset Services will cost another £6 million of profit. Cost-cutting to repair the damage will only feed through next year.

Capita has warned of a legal dispute with the Co-op Bank. It won a £325 million 10-year contract to transform the Co-op's mortgage servicing operation in November 2014. As part of the deal, the outsourcer has taken over the bank's Staffordshire and Plymouth mortgage operations, and mortgage staff and assets of Western Mortgage Services to ensure it complies with regulations.

"The issue is that our client has not fulfilled their obligations," chief executive Andy Parker said in a conference call. "We are on track to deliver what we have been contracted to deliver. We believe the client is holding up delivery because they don't want to pay. This is about client issues, not our delivery."

Not up to standard

Armed with a decent track record of contract execution, delays to implementing the new IT systems for TfL have come as a surprise for some. Although the system has now gone live, missing its August deadline cost Capita £20-25 million.

"Our delivery wasn't up to the standard we had expected," admitted the boss. "We suffered significant delays that proved to be more complex that ourselves and the client had expected."

Including its recent deal with mobile phone giant Three, Capita has won contracts worth £949 million in the year to date. But continued delays to customer decision making and lower pipeline conversion has hit forecasts for the second half of the year. Contract timings have seen a "general shift to the right".

These issues will obviously hit Capita's financial position, with its net debt to annualised cash profit ratio expected to climb from 2.5 to 2.7 by the end of the year after "modest" acquisition spend. That's slightly above its target of 2-2.5 times.

"We remain confident of the strength of our business model and aim to return the group to profit growth next year, excluding the benefit from TfL one-off costs dropping out," adds Parker.

Capita shares traded as low as 657p Thursday, yet this crash is perhaps no surprise. It had lost a third of its value in the eight months to July, and a summer break-out had already begun to unwind. A three-year rally that began in 2012 has now completely gone up in smoke and the shares are worth no more than they were at regular intervals during the Credit Crunch.

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