Capita shares set to slump after major H1 earnings loss

Capita shares are down more than 8% on Tuesday morning after the company reported a £28.5 million loss in its half-year (H1) results.

The UK-based outsourcing and professional services company recorded the loss after it suffered a ‘significant’ hit from the Covid-19 crisis, with the firm warning investors that it is unlikely it will generate sustainable cash flow for up to two years.

‘This crisis has come in a pivotal year for Capita when we had expectations of beginning to generate revenue growth and sustainable cash flow,’ Capita CEO Jon Lewis said in a statement.

‘Instead, we have had to focus on managing our way through the crisis,’ he added.

Capita is trading at 32p per share at the time of publication, with the stock down 80% year-to-date.

Capita H1 earnings: key figures

Adjusted revenue is down 9% to £1.7 billion, with that figure dragged lower by 2019 contract losses and the economic fallout of Covid-19, the company said.

The outsourcing and professional services firm reported a pre-tax loss for the six months ending on 30 June, compared to the £31.2 million the business recorded during the same period a year prior.

Adjusted net debt meanwhile stands at £609.5 million.

Despite the firm delivering £73 million in savings as part of its cost transformation programme, the worrying thing for investors moving forward is the company’s admission that it will struggle to generate cash flow for up to two years.

‘Having reported a first half loss of £28.5 million, Capita is now looking at second half revenues to be flat to slightly down,’ Jeremy Naylor, market analyst and presenter at IG, said. ‘The one highlight is the potential sale of its Educational Software Solutions business, the proceeds of which will be used to bolster the balance sheet.’

This will likely see the a lot of pressure put on the share price, particularly as the company scrapped its dividend. Investors may choose to invest in rival Serco Group instead, with the company reporting a rise in profit earlier in August.

Capita outlook looks grim

In its H1 earnings, Capita said that it will make asset disposals in order to strengthen its balance sheet. However, the company expects the impact of the coronavirus to ‘continue to negatively impact volumes and transactional revenue’ for some time.

Proceeds from asset sales will primarily be used to reduce its debt pile and pension liabilities, the company said.

As a consequence, the firm is focusing on building a more sustainable business, capable of navigating the myriad of headwinds rather than driving growth.

‘We expect to make further disposals which, alongside other measures, will strengthen the balance sheet and help build towards a more focused, sustainable Capita for the long term,’ Lewis added.

‘These are unprecedented times and we need to adapt but our strategy remains the right one.’

How to trade stocks with IG

Looking to trade Capita and other stocks? Open a live or demo account with IG and buy (long) or sell (short) shares using derivatives like CFDs in a few easy steps:

1. Create an IG trading account or log in to your existing account
2. Enter ‘Capita’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade