Wednesday, 31 January 2018

Analysts caught off guard by 41% Capita share drop

Cat Rutter Pooley in The Financial Times

There may be some red-faced analysts across the City this morning. 

Only two out of 16 analysts polled by Bloomberg had a sell rating on Capita before today, when its shares plummeted 41 per cent on a profit warning and planned £700m rights issue. 

Of the rest, 11 had a hold rating and three a buy rating. 

One of those buy recommendations came from Numis, which issued its note on the company two weeks ago. 

Then, Numis described a meeting with the new Capita chief executive as “positive”, noting that: 

 It is easy to be critical of the past, but his observations on some of the structural and cultural issues at Capita highlighted some fundamental problems, but also material opportunities. We were encouraged by [Jonathan Lewis’s] comments on the need for great focus, cost reductions (whilst also re-investing for growth), and need to focus on cash. 

Numis declined to comment immediately on whether it was reviewing the recommendation in light of the company’s update. 

Jefferies, which has also had a ‘buy’ recommendation on the stock, characterised Wednesday’s announcement as a “kitchen sinking”, or effort to cram all the bad news out at once. The revelations could generate a 40 per cent decline in earnings expectations for the full year, it said, adding that the revenue environment remained “lacklustre”. 

Shares are current trading around 210p, down 40 per cent. 

Meanwhile, the ripples from Capita’s share price drop are leaking across the outsourcing industry. Serco slipped 3 per cent, and Mitie was down 2.4 per cent at pixel time.

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