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2020 was supposed to be Capita's year. The outsourcing firm, known for operating London’s congestion charge and low emissions zone, has been undergoing a “multi-year transformation to become a more sustainable business”, and had expected this to be the year it returned to growing revenues.
COVID-19 has certainly thrown those plans off course, without derailing them entirely. In the eyes of chief executive, Jon Lewis, “these are unprecedented times and we need to adapt, but our strategy remains the right one”.
Capita’s half-year results today revealed a revenue decrease of 9% to £1.65 billion, down from £1.82 billion this time last year, and adjusted pre-tax profit of £30.1 million, a considerable decline from the £117.8 million reported last year.
These figures confirm much of what shareholders had already suspected - their concern had seen the company’s share price skydive from 168.5p at the start of the year to a low of 24.1p in April.
Laying the groundwork
While the pandemic goes a long way to explaining those poor results, contract losses were also a significant factor. Lewis has remained optimistic about the company’s trajectory, but growth heading into 2020 had not been as fast as expected.
In March this year, the firm reported a £62 million loss over 2019 and a 4% reduction in revenue. At the time, Lewis acknowledged “there is more to do to achieve our goals and, while we are convinced that the plan remains the right one, not everything has worked in our favour”.
Lewis has always been quick to explain underperformance within the context of these overarching goals. Upon his arrival at the company in 2017, he laid out plans to make Capita a simpler, more efficient, more stable business and one which generates long-term, sustainable growth. In 2018, he explained how “significant change is required for Capita’s next stage of development.” Lewis’ primary aim was to strengthen the balance sheet through “cost savings and non-core disposals.”
Disposals of non-core assets like ESS (Education Software Solutions) have helped the company trim the fat and focus its cash flow on the best performing contracts. As restructuring continues and debt creeps up, further disposals are likely to follow.
That, of course, was then, and while Lewis was thinking more of the immediate trouble Capita’s found itself in when he joined, he now has the unforeseen difficulty of progressing the company’s restructuring through a global pandemic. Nevertheless, the trouble undergone in 2018 may have made his job now that bit easier.
Strong fundamentals make the difference?
Today’s results show that Capita has suffered this year, and the delay in the return to growth caused by the pandemic means the company looks unlikely to generate sustainable cash flow for another one to two years. It also expects revenue over the remainder of 2020 to remain flat or perhaps even down on the first half.
As such, Lewis’ drastic measures may have come at a good time. In March’s report, he noticed how “the balance sheet was significantly strengthened in 2018”, and that “as part of our drive for simplification, we decided to seek to dispose of a number of non-core businesses, the proceeds from which will be recycled to strengthen the group.”
Long-term contracts with government and blue-chip customer bases have helped, and so have contract wins with the DWP and NHS, as well as last week’s £355m deal with the TFL to manage London’s congestion charge, a contract which will see the company recruit an additional 900 to its 50,000 strong workforce.
While it’s clear that Capita’s long-term ambitions have been postponed, the company’s planning may just have kept them realisable.
That’s certainly how Lewis sees it: “robust cost and cash saving initiatives have partly mitigated the negative impact (of COVID-19); these have only been possible due to the actions we have taken over the past two years to simplify and strengthen the organisation.”
Over the past couple of weeks, we’ve explained how strong fundamentals are essential for companies as they look to survive through these unprecedented times - no matter whether you’re finding your feet amid the high-street desertion like Greggs, or navigating the turbulent winds of the travel sector like Tui.
Capita’s results today tell a similar story. They serve as a reminder that now is the time to look at your companies and ensure that they don’t have any non-performing assets on their books, no vanity projects, and are squeezing the most out of their core offering.
More on Capita PLC
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