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Is Capita the next Carillion?

An unexpected profits warning, and a slump in the share price at another big outsourcing company.

Capita is doing a passable impression of Carillion - but while Capita is in trouble, it’s not dead yet.

Capita’s new chief executive, Jonathan Lewis, has suspended the dividend and is tapping (long-suffering) shareholders for £700m to pay alarmingly high levels of debt.

Part of the “significant change” that is promised to turn Capita around will include cost cuts and out-sourcing.

Capita’s 49,000 UK staff will righty be concerned.

Like Carillion, Capita’s biggest customer is the British government. Same sector, but very different services.

Carillion’s staff built things, cleaned hospitals, served school dinners. Capita sees itself as a bit more “white collar”.

Its staff design software for schools, manage patient records for the NHS and collect the licence fee for the BBC.

  • Cost-cutting plans mean that Capita will hopefully not be the next Carillion, Business Editor Joel Hills explains.

Capita is in trouble both because it has struggled to win new business and made a hash of some of the high profile contracts it had secured.

In the last few months, Prudential and the Ministry of Defence have cancelled commercial agreements on the grounds Capita was failing to meet the required levels of performance.

Michael Donnelly is a business analyst at Panmure Gordon. He told me he expressed concern about Capita’s balance sheet two years ago when he urged his clients to sell the company’s shares. Capita’s share price has since fallen by 80%.

"The chief exec said this morning the business has been under-invested. We calculated two years ago that under-investment might be more than £250m, which is significant," Connelly said.

"Capita will look very different in the future than it has in the past, but it will survive."

Capita’s short-term prospects are very much in the government’s hands.

According to Tussell, which collects data on public tenders and government contracts, Capita has won more business from HM Government since 2015 than any other private sector supplier. £238m of those contacts are set to expire in 2018.

If Capita can retain them, then that’s a big step forward.