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Capita crash deals more woe to Woodford and Barnett

Capita delivers more pain to backers Neil Woodford and Mark Barnett by scrapping dividend, announcing rights issue and warning on profits.

Capita crash deals more woe to Woodford and Barnett
 

Shares in Capita (CPI) have plunged as the embattled outsourcing group announced a rights issue, suspended its dividend and said it would sell assets to plug its pension deficit, as it delivered another profits warning.

The shares tumbled 40% to 207.9p, delivering more pain to two of its biggest backers, fund managers Neil Woodford and Mark Barnett.

Capita said it would launch a rights issue of up to £700 million and suspend the dividend until it was 'generating sustainable cash flow'.

The group will sell a number of 'non-core' businesses, such as its ParkingEye car parking technology division and Constructionline contractor directory arm.

Some of the proceeds are likely to go towards reducing Capita's pension deficit, which stood at £381 million in June.

Chief executive Jonathan Lewis, in the post since December last year, said the group was 'too widely spread across multiple markets and services, making it more challenging to maintain a competitive advantage in every business'.

'Today, Capita is too complex, is driven by a short-term focus and lacks operational discipline and financial flexibility'.

The barrage of bad news follows a string of profit warnings from the group, which first warned in 2016 that it had taken on more work than it could handle. Shares in the group are down 84% over the last two years.

Woodford has been a long-term backer of the company and holds the stock in his Woodford Equity Income and Income Focus fund.

Woodford Investment Management said in its latest update to investors in the Income Focus fund that he had bought more shares in the group in December, despite acknowledging the potential threat to the dividend, which amounted to 31.7p last year.

'With a new chief executive now in place, clearly that eventuality cannot be completely ruled out, but having met Jon Lewis during the month, we are reassured that decisions around capital structure and the dividend will be informed by a clearer long-term strategy for the business, something we expect to hear more about later this year,' it said earlier this month.

Woodford holds 0.9% of his £8.3 billion Equity Income fund in the stock, and 1.4% of his smaller Income Focus fund.

His successor at Invesco Perpetual, Mark Barnett, meanwhile holds Capita in his £10.3 billion High Income and £5 billion Income funds.

Capita's woes have contributed to a difficult year for both of the income heavyweights.

Over the year to yesterday, the Woodford Equity Income fund is rooted to the bottom of the Investment Association's UK Equity Income sector as the only to fund to have failed to deliver a positive return, with a flat performance.

Barnett's Invesco Perpetual Income and High Income funds have likewise struggled, with respective returns of 3.7% and 3.9% over the last 12 months placing them towards the bottom of the UK All Companies sector.

Mike van Dulken, head of research at Accendo Markets, said Capita's update was 'about as ugly as it gets'.

'This will have been a painful update to release to the markets, and may well sting a while longer,' he said.

'However, it may yet prove a case of honesty being the best policy and short-term pain being necessary to ensure a successful turnaround and deliver long-term gains for loyal shareholders who've had it tough to say the least.'

Russ Mould, investment director at AJ Bell, said the news was likely to spark more jitters over the outsourcing sector following Carillion's collapse into liquidation.

'New management often take the opportunity to rebase expectations, but it is rate for their actions to be quite as drastic as those Lewis has outlined,' he said.

'Today's news is likely to lead to renewed focus on the wider outsourcing sector after Carillion's collapse earlier this month.'

MP Frank Field, chair of the Work and Pensions Committee, said Capita would now be investigated, after the probe into Carillion.

'Another day, another outsourcing firm with massive debt, a huge pension deficit, a KPMG audit and the big four popping up at every turn in the company’s chequered history,' he said.

'Sadly, Capita goes on the growing list of firms we are investigating to see if their conduct has endangered current and future pensioners’ rights.'

Jefferies analyst  Kean Marden, who rates the shares a 'buy' said today's news was likely to cut 2018 earnings by around 40%.

Shore Capital's Robin Speakman, who has a 'sell' rating on the shares, welcomed the new chief executive's changes.

'We, and others, have discussed the probability and requirement for such action, investing in the group's future,' he said.

Peel Hunt analyst Christopher Bamberry, who rates the shares a 'hold' also welcomed the shift.

'The focusing of the group on a small number of better competitively positioned businesses, with a strengthened balance sheet, allowing appropriate levels of investment, are welcome steps in the right direction,' he said.

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