CAPITA PLC EDINBURGH (Reuters) - Britain's biggest outsourcing firm Capita (>> Capita PLC) may need to raise capital, sell assets or cut its dividend to protect itself from Brexit-related tremors rocking the sector that have sent its stock plunging to 10-year lows.
Capita has largely avoided the scandals that have hit rivals G4S (>> G4S plc) and Serco (>> Serco Group plc) in recent years.
But years of acquisitions have left it looking weak at a time when competition is growing and clients are reluctant to agree deals because of uncertainty created by Britain's June vote to leave the European Union.
Its near-total focus on Britain means that unlike some rivals it cannot benefit from the translation of foreign currencies back into a weak pound.
Capita warned in September that delays in decision-making by customers after the Brexit vote would hit its 2016 profit, sending its shares tumbling and halving its market value to 3.6 billion pounds.
Investors will be looking for answers when the company gives a trading update on Thursday.
"Capita needs to look at pre-emptive steps including disposals, dividend cuts and/or a capital increase," said HSBC, which expects the firm's dividend per share to fall to 16 pence in 2017 from 31.70 pence this year.
British governments and companies have outsourced large parts of their basic needs -- such as administration, security and cleaning -- over the last 30 years to try to cut costs.
But the practise drew fire in 2012 and 2013 when G4S and Serco were found to have overcharged the government on some contracts and failed on others.
Capita provides basic facilities over a diverse range of sectors from banking to transport, retail and health. But that approach has sparked fears from the investment community that the group may now be unwieldy.
In a nod to this, Capita said last month it would simplify its structure, reducing the number of business units and their reporting lines to boost oversight and transparency.
It did nothing to help its stock, now trading at around 542 pence, around a 10-year low. Analysts flag a rise in one-off items on its accounts, frequent reorganisations and a larger number of accruals - where future revenues are accounted as cash. After years of small purchases, it has to service almost 2 billion pounds of debt on average forecast revenues of around 4.87 billion pounds this year.
Margins are under pressure but some analysts complain that it is hard to see where the group is doing well or badly.
It is not the only outsourcer struggling. Rival Mitie (>> Mitie Group PLC) issued its second profit-warning in as many months in November, citing fewer new orders because of Brexit, rising costs such as Britain's minimum wage and tougher local government budgets. That backdrop means profit margins are likely to tighten further when contracts come up for renegotiation. Capita got some respite on Oct. 19 when one of its biggest shareholders Woodford expressed faith in its dividend and capital, saying the stock decline looked "disproportionate".
But since then the shares have trended lower. In September Capita said its underlying pre-tax profit would fall by 10 percent to 13 percent in 2016, and that it now saw net debt to core earnings (EBITDA) at around 2.7 times at year-end versus 2.5 times at end-June 2016.
"We think recent events will eventually mean management change and a review of contracts and strategy," said RBC analyst Andrew Brooke. "We continue to see too many risks despite the share price fall".
(Editing by Kate Holton and Adrian Croft)
By Elisabeth O'Leary
