Capita plc - Trading update

London, September 28

Capita plc (‘Capita’), the UK’s leading provider of technology-enabled customer and business process management services, is today issuing a trading statement covering second half performance to date and the outlook for the full year 2016.

Summary
Capita achieved good profit growth in the first half of 2016, at which time we expected organic revenue growth of around 4% for the full year. Subsequently, our performance in the second half of the year to date has been below expectations, as a result of a slow-down in specific trading businesses, one-off costs incurred on the Transport for London (TfL) congestion charging contract and continued delays in client decision making. As a result, we now expect revenue growth for the full year to be in the range of 4-5%, including around 1% organic growth net of attrition, and underlying profit before tax to be in the range of £535m to £555m for the full year to December 2016, compared to the current company compiled consensus profit before tax estimate of £614m.

Divisional trading
The Group has been impacted by a recent slow-down in the IT Enterprise Services division, in particular our technology reseller business, and specialist recruitment in the Workplace Services division. Since the half year, our expectation for profits from these businesses for the full year has reduced by around £30m. Capita is taking immediate steps to reduce the cost base in the underperforming businesses, which should benefit 2017. The Digital & Software Solutions division continues to perform well but, as referenced at our first half results, our Asset Services division has seen less activity in the short term, following the EU referendum.

Contract implementations
We have experienced delays on the implementation of new IT systems on the Transport for London (TfL) congestion charging contract. As a result, we expect to incur between £20m and £25m of one-off costs, which will be included in our underlying results. The systems have now gone live, the contract is performing well operationally and these costs will not recur next year. Furthermore, we are in a contractual dispute with the Co-op Bank regarding obligations relating to the transformation of services.  The ongoing mortgage processing being undertaken by Capita is performing well.  However, there is a risk of litigation in respect of the transformation.

Major sales
The Group has announced £949m major contract wins in the year to date, including being recently selected by Three as the preferred bidder for a contract to provide customer management services in the UK, which is expected to start in 2017. However, revenue from new major sales in the second half of this year is likely to be lower than expected, due to continued delays in decision making and lower conversion of our pipeline.

Financial position
Capita’s net debt to annualised EBITDA ratio at end June 2016 was 2.5. As a result of the aforementioned trading issues and one-offs we now expect net debt to EBITDA to be in region of 2.7 at the year end, including a modest amount of additional acquisition spend. We continue to expect capital expenditure to be lower than last year and expect net debt at end December to be similar to net debt at end June. We have good headroom and liquidity.