Shares in troubled outsourcing group Capita (CPI) have jumped by more than 11% to 177.8p despite the company announcing a heavily-discounted rights issue to raise £701m to repair its balance sheet.
The share price rise can be attributed to investor relief that the company is getting a large financial injection and can now focus on the job at hand, which is revitialising growth and streamlining the business.
Capita plans to issue just over 1bn new shares at 70p each. Existing investors will be able to buy three shares for every two that they already hold.
Read this article if you want to learn more about how rights issues work.
Capita’s rights issue is fully underwritten by various investment banks who will buy any shares that aren’t snapped up by existing investors. That means it is guaranteed to get the full £701m.
The money will be used for a variety of purposes; £220 to fund a transformation programme including £150m to drive the £175m of cost savings by 2020.
After £150m is used for pre-payment of US private placement notes, the balance will be used for Capita’s investment programme.
WHAT DOES CAPITA DO?
Capita is involved a wide variety of services from collecting the BBC license fee to providing administration services to insurer Prudential’s (PRU) life and pensions business.
The company says it expects private sector partnership profits to decline this year due to higher contract and volume attrition. There are also greater costs involved due to the adoption of new data regulation called GDPR.
Coinciding with the fundraising announcement was the publication of its full year results. Capita reported a pre-tax loss of £513.1m for 2017, a lot worse than its £89.8m loss the prior year.
It’s not all bad news; revenue came at £4.24bn, around £25m higher than broker Shore Capital’s forecast. Its net debt position also beat Shore Capital’s prediction of £1.15bn, coming in at £1.12bn.
WHAT IS THE GROWTH PLAN?
When Jon Lewis was parachuted in last December to rescue the company after repeated profit warnings, he set out his plans in no uncertain terms.
He described the business as ‘too complex’ although the company had already disposed of Capita Asset Services and its specialist recruitment businesses.
Further strategic disposals are planned including car park management business ParkingEye and Constructionline, an industry database.
Lewis is targeting a five-year growth strategy built around software, human resources, customer management, government services and IT services. These five areas are expected to account for 75% of revenue in 2018 according to investment bank Goldman Sachs.
AJ Bell’s investment director Russ Mould says: ‘The new cash should help remove financial pressures on the company's balance sheet and allow management to focus on finding ways to revive Capita's fortunes. However, the business will still be under pressure to show positive results fairly quickly if it is to keep investors on side’.
If the company manages to achieve its targets including double digit earnings before interest and tax by 2020 and £200m free cash flow then Lewis’s tough stance may be viewed to have paid off.
