Capita feels the pinch as clients curb spending

By @ibtimes on

British outsourcing group Capita said spending pressure on cash-strapped clients meant it would only deliver reasonable 2011 revenue growth, undermining hopes for its longer-term prospects and sending its shares to a 2-1/2 year low.

Capita, which runs the Teachers' Pension Scheme and the Criminal Records Bureau in the UK, said on Friday a decline in revenue generated from contracts would be offset by a 14 percent contribution from acquisitions to leave expected full-year revenue growth at around 7 percent.

It also said a strong bid pipeline left it more positive for 2012.

We are aware that 2011 has been a tough year. The sales that we win in 2011 will be the raw material for creating organic growth in 2012, Chief Executive Paul Pindar told Reuters. We are expecting a flow of decisions all the way through to our results in February.

But some analysts questioned the company's prospects as outsourcing companies contend with a squeeze on public sector spending and delays to work as customers work out how best to save money.

Analyst David Brockton at banking group Espirito Santo maintained his sell rating on the stock pending major contract awards in 2012, which could signal a return to organic growth.

We continue to believe that timing (and the likely outcome) of these new wins remains uncertain and as acquisitive spend slows, these awards are increasingly required to meet 2012 expectation for a return to organic growth.

Shares in Capita, which employs around 45,000 people, were down 4.1 percent to 640.5 pence at 10:17 British time. The stock touched a low of 631p, its lowest since April 2009.

The group, which in September signed a 105 million pounds contract with the UK pensions regulator, has spent 334 million pounds on acquisitions this year to help sustain growth in tough UK markets hampered by budget cuts and delays to the awarding of contracts outsourcing firms have long looked set to benefit from.

Revenue in Capita's IT, recruitment and property services businesses have been hit as public sector bodies rein in spending and cut jobs and project funding.

RAW MATERIALS

The group said it had won 1.26 billion pounds worth of work in the year to date, which includes the 570 million pound expansion of an existing deal with Zurich Financial , but progress was being hit by the tough economic climate.

This progress is somewhat counterbalanced by the prevailing pressure on spending which continues to affect adversely a small number of our trading activities and is also constraining discretionary additional revenue from existing clients, the company said in a statement.

Capita, which in July said it had a bid pipeline of 4.7 billion pounds, said it expected a number of major bid decisions in the final quarter of 2011 and that future growth would be supported by pressures on public and private sector organisations to find more efficient service delivery.

The company is expected to post a full-year pretax profit of 383.12 million pounds for 2011, according to consensus on a Thomson Reuters I/B/E/S poll of 23 analysts, with revenue of 2.9 billion pounds.

Pindar said he had guided analysts to 2012 revenue of between 3.28 billion pounds and 3.3 billion, representing a headline growth rate of 13 percent against 7 percent in 2011.

This compares with a 3.23 billion revenue forecast by analysts at Investec Securities.

On Thursday, British outsourcing rival Serco said it continued to see its core UK and U.S. markets hampered by a tough economic climate and budgetary delays, although it remained on course to meet full-year expectations.

The rivals are up against each other for a British Army recruitment contract, believed to be worth around 750 million pounds, which is due to be announced in the first quarter of next year.

Capita has also strengthened its police services offering this year with acquisitions including human resources specialist Cedar as it looks to win work with forces facing up to budget cuts and pay issues.

(Editing by Rhys Jones and David Holmes)

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