Saturday 18 November 2017

Blunders cost Capita as outsourcing sector sours

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John Lynch

Exactly 100 years ago this month the Communist icon Lenin was actively planning his return to Russia to put the final polish on the Bolshevik revolution. By all accounts he was a man of strong convictions which, a century later, people still discuss.

However one thing is certain, if one of his lieutenants had been inspired enough to inform him that 'outsourcing' was going to be the next international businesses' big invention, it would surely have steeled his relentless drive for world revolution!

Attitudes to outsourcing reveal, more than most other things, which side of the divide one is on. To a dedicated trade unionist, it is the 'Devil's work' and a major source of job insecurity.

But for some employers it generates cost savings, increased productivity, facilitates a smaller workforce, mitigates skills shortages and allows firms to focus on 'core competencies'.

What is indisputably true is outsourcing concerns have become big businesses, like the one we are examining today, the London-listed Capita plc.

A biased view is that outsourcing is what you would get from a gang of hyperactive accountants left to their own devices. So it may be no surprise that Capita emerged from the Chartered Institute of Public Finance & Accountancy. In 1987 it was backed by the venture capitalist 3i, and prospered. Today it employs some 70,000 people and generates an income of £4.7bn (€5.6bn), equally from the private and public sector and mainly from the UK.

It is nearly four years since this column last examined Capita. It noted the industry's rise following the election of the David Cameron government in the UK which accepted the privatisation model for the state sector particularly in areas like IT and HR.

If elected it will be interesting to see what policy the Tory government under Theresa May will adopt. In this environment Capita started mopping up companies but at cost, its net debt today is a significant £1.9bn. It did the same thing in Ireland. The international service business of AIB and a contract to service Anglo Irish Bank loans on behalf of Nama were acquired.

Today things are not good for Capita. Two profit warnings and the Brexit vote has not helped. Four years ago it was obvious the company had a broad range of contracts like managing the Criminal Records Bureau and a recruitment programme for the British military. But it had a propensity for cock-ups. A contract for the UK Border Agency involving migrants and deportations was one which went horribly wrong. Another IT contract for Transport for London is the latest to get bogged down.

But the hectic pace of its acquisitions programme (47 in a short time) has unsettled Capita. Though helping revenue it also brought the problems of acquisition costs, impairment charges, disposal costs and management. So it is no surprise the company plans to reduce the number of divisions from 11 to six.

We fancied in this column that organic growth was needed. In 2016 it was only 1pc. The last time we looked Capita's share price was trading at £10.18. Today it is half that level and the stock is trading on an earnings multiple of 10 times.

The market value of the company has plunged from £6.5bn to £3.7bn. It was also turfed out of the prestigious FTSE 100, leaving long-term investors very unhappy.

It is a shock to go back to a sector which looked promising and see how the mood has turned so sour.

Conglomerates like Capita have gone out of favour. Meanwhile, Brexit may be thought by some to be heralding a new Elizabethan age of trade expansion, but clearly not everyone agrees.

Given the profit warnings and the poor trading patterns, it is no surprise that the CEO Andy Parker has been given the big elbow.

His successor is confronted with the task of shrinking the company, reducing the debt and injecting a higher quality 'core' to the company.

I am negative on these shares at the moment and if I had shares I would offload them, not out of concern about the ghost of Lenin, but because the sector may have seen its best days.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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