British outsourcing group Capita lost 40% of its market value today after its new boss cut profit forecasts and set out plans to raise cash to avoid the same fate as collapsed Carillion.
Just two weeks after one of its rivals perished under a pile of debt, Capita, which provides IT services to companies and governments to cut costs, said it needed a complete overhaul and to retrench.
The company lowered its 2018 profit forecast by 30% only seven weeks after it had reiterated it following a string of warnings last year.
Under new chief executive Jonathan Lewis who arrived in December, Capita said it would raise around £700m in a rights issue in 2018.
It also said it would cut its dividend and sell assets to enable it to boost investment, focus on contract profitability, and plug a hole in its pensions scheme.
£970m was wiped off the company's market value today, taking the stock down 85% since a peak in mid-2015. Its share price was trading at levels last seen in 2003.
Capita provides IT and administrative services to a number of Irish companies and also manages the Eircode post code service under a state contract.
The company has a workforce of over 2,500 across the island of Ireland and among its contracts is one with the Department of Justice and Equality, where it provides managed IT services.
It also serviced loans for NAMA at one stage, but sold that business last year to the UK's Link Group.
"Capita needs to change its approach," CEO Lewis said.
"We cannot continue to focus on the incredibly broad array of disparate businesses. The strategic review we're undertaking will cause Capita to shrink, cause Capita to focus," he added.
Like Carillion, Capita provides vital services in the UK from running the system which pays National Health Service dentists to hospital triage support, collecting the congestion charge for driving in central London and helping retailers manage online shopping sites.
It employs 73,000 people and operates mainly in Britain over hundreds of separate contracts.
The news sent shockwaves through a sector still reverberating from Carillion's demise on January 15.
Carillion, which built large infrastructure projects, was largely brought down by problems on a number of its construction contracts and not the day-to-day provision of services.
Capita, meanwhile, did not specify which contracts were problematic but pointed to a lower number of new contracts being awarded for smaller amounts, in a more sluggish business operating environment.
UK outsourcing has grown rapidly since the 1980s and is now dominated by a raft of giants such as G4S, Serco, Capita, Mitie and others who employ hundreds of thousands of staff to provide services to the public and private sector.
Many were hit after they took on work at wafer-thin margins during the financial downturn, leaving little room for error.
Brexit has compounded the sector's woes because of its uncertainty, and led to a raft of profit warnings.
Capita's plans were just the beginning of a long road back to recovery, analysts said, but they welcomed the fact that the new boss was acting swiftly.
Capita's problems had been sown over a long period, said Lewis, who has a reputation for turning around firms, such as oil services company Amec Foster Wheeler, where he cut costs to boost profitability.
"Capita has underinvested in the business and there has been too much emphasis on acquisitions to drive growth," he said.
"An immediate priority is to strengthen the balance sheet through a combination of cost savings, non-core disposals and new equity," he said.
Capita said underlying pretax profit, before significant new contracts and restructuring costs, were expected to be between £270-300m, compared with analysts' average forecast of £406m, according to Reuters data.
It forecast net debt at the 2017 year-end in the region of £1.15 billion. The dividend would be suspended until the company generated sustainable free cash flow.
The firm is also undertaking a triennial review of its pension scheme.
Its current expectation is that the actuarial deficit after this review will be significantly below the last disclosed deficit of £381m as at June 30 last year.
"We will seek to reduce the remaining deficit as a priority," it said.
