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Thursday 01 August 2019

Capita’s transformation – a mid-way status check

CapitaCapita is now half way through its three-year turnaround plan, to do “fewer things better” and today’s half-year results are a good opportunity to reflect on progress to date.

Firstly, a look at the headline numbers shows both revenue and operating profit continuing to decline – Capita achieved adjusted revenue for the first six months of 2019 of £1.85bn down 6.3% year-on-year (£1.98bn H118) with operating profit of £142.1m down 10.3% (£158.4m H118).

When you look across Capita’s divisions its very clear that it is being pulled back by performance in ‘Specialist Services’ – this is the Division that contains an eclectic mixture of contracts and businesses that don’t easily fit elsewhere within the current structure. Adjusted revenue in Specialist Services shrank YoY by 23.7% to £376.1m (£493.2m H118) whilst adjusted operating profit fell YoY 16.5% to £67.7m (£81.1m H118). Much of this can be attributed to attrition in Capita’s Life & Pensions and Insurance businesses and specifically the ending of large contracts with the Prudential and Marsh in 2018. There were also more modest declines in Real Estate & Infrastructure, Travel & Events and Enforcement businesses.

When you look across the other Divisions and given the market conditions and restructuring going on, the performance is much more consistent - there were modest declines in revenue in Software (-4.1%) and Customer Management (-1.3%) with IT & Networks stable and Government Services and People Services putting on growth of 1.4% and 0.4% respectively.

Taking out cost and streamlining the business has been a big focus of the last 18 months and Capita is targeting £175m of cumulative savings by the end of this year. This has seen the usual rationalisation of IT, property, back office and procurement but also a renewed push for automation (incl. a new partnership with UiPath) and offshoring with a ramping up of its centres in South Africa and India.

Whilst cost cutting and rationalisation was definitely needed you cannot cut your way to growth. Here Capita has been investing heavily in its Growth function, specifically hiring new talent with more consultative selling and relationship management skills. Capita’s sales and business development is starting to look and feel very different – it has a new consulting arm targeting higher value opportunities coming out of the ‘digital chaos’ we see in the market, has launched a ‘Think Tank’ (Capita Institute) and is pushing things like TEDtalks as it looks to take a lead in setting client’s agendas. All of this is positive, but a sales function is only as good as ‘scores on the doors’ and contract wins have been slow of late, no doubt indicative of the wider market.

Sales wise we have seen the big announcements of a £525m Defence Fire and Rescue Project (originally announced 12 months ago) and yesterday’s extension of its PIP contracts. Overall order intake in for H1 was £830m, including extension of Customer Management contracts with Carphone Warehouseand Southern Waterand some Software wins which increased the order book by 6.5%, now standing at £6.7bn (was £7.1bn end of 2018).

Getting back to organic growth is key for Capita and whilst the investment in the Growth function is very much welcome it must of course have market appropriate propositions. In addition to its new Consulting offer its other key area of focus has been creating digitally-enabled services – here Capita has been investing in a range of products. 

Two new ‘People Service’ digital products scheduled to go live in the second half of 2019 include a digital version of its pre-employment screening service and a new employee onboarding product. New versions of some of its ‘greatest hits’ including SIMS (School Information Management System), One Housing and emergency services software as well as a multi-channel customer management platform.

In summary, Capita’s outlook remains unchanged and it remains on track to deliver its 2020 targets of £175m initial cost savings, double-digit adjusted operating profit margin and at least £200m of sustainable annual free cash flow. There is much to like about the work going on with new propositions and the growth function in particular. The challenge of course is converting this into new contracts of a scale that ‘shift the dial’and here Capita remains very much at the mercy of a wider market experiencing some tough conditions.

Posted by Marc Hardwick at '09:00' - Tagged: results   transformation   Capita