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Capita crash deals more woe to Woodford and Barnett

Capita crash deals more woe to Woodford and Barnett

by Daniel Grote Jan 31, 2018 at 10:03

 

Shares in Capita (CPI) have plunged as the embattled outsourcing group announced a rights issue, suspended its dividend and said it would sell assets to plug its pension deficit, as it delivered another profits warning.

The shares tumbled 40% to 207.9p, delivering more pain to two of its biggest backers, fund managers Neil Woodford and Mark Barnett.

Capita said it would launch a rights issue of up to £700 million and suspend the dividend until it was 'generating sustainable cash flow'.

The group will sell a number of 'non-core' businesses, such as its ParkingEye car parking technology division and Constructionline contractor directory arm.

Some of the proceeds are likely to go towards reducing Capita's pension deficit, which stood at £381 million in June.

Chief executive Jonathan Lewis, in the post since December last year, said the group was 'too widely spread across multiple markets and services, making it more challenging to maintain a competitive advantage in every business'.

'Today, Capita is too complex, is driven by a short-term focus and lacks operational discipline and financial flexibility'.

The barrage of bad news follows a string of profit warnings from the group, which first warned in 2016 that it had taken on more work than it could handle. Shares in the group are down 84% over the last two years.

Woodford has been a long-term backer of the company and holds the stock in his Woodford Equity Income and Income Focus fund.

Woodford Investment Management said in its latest update to investors in the Income Focus fund that he had bought more shares in the group in December, despite acknowledging the potential threat to the dividend, which amounted to 31.7p last year.

'With a new chief executive now in place, clearly that eventuality cannot be completely ruled out, but having met Jon Lewis during the month, we are reassured that decisions around capital structure and the dividend will be informed by a clearer long-term strategy for the business, something we expect to hear more about later this year,' it said earlier this month.

Woodford holds 0.9% of his £8.3 billion Equity Income fund in the stock, and 1.4% of his smaller Income Focus fund.

His successor at Invesco Perpetual, Mark Barnett, meanwhile holds Capita in his £10.3 billion High Income and £5 billion Income funds.

Capita's woes have contributed to a difficult year for both of the income heavyweights.

Over the year to yesterday, the Woodford Equity Income fund is rooted to the bottom of the Investment Association's UK Equity Income sector as the only to fund to have failed to deliver a positive return, with a flat performance.

Barnett's Invesco Perpetual Income and High Income funds have likewise struggled, with respective returns of 3.7% and 3.9% over the last 12 months placing them towards the bottom of the UK All Companies sector.

Mike van Dulken, head of research at Accendo Markets, said Capita's update was 'about as ugly as it gets'.

'This will have been a painful update to release to the markets, and may well sting a while longer,' he said.

'However, it may yet prove a case of honesty being the best policy and short-term pain being necessary to ensure a successful turnaround and deliver long-term gains for loyal shareholders who've had it tough to say the least.'

Russ Mould, investment director at AJ Bell, said the news was likely to spark more jitters over the outsourcing sector following Carillion's collapse into liquidation.

'New management often take the opportunity to rebase expectations, but it is rate for their actions to be quite as drastic as those Lewis has outlined,' he said.

'Today's news is likely to lead to renewed focus on the wider outsourcing sector after Carillion's collapse earlier this month.'

MP Frank Field, chair of the Work and Pensions Committee, said Capita would now be investigated, after the probe into Carillion.

'Another day, another outsourcing firm with massive debt, a huge pension deficit, a KPMG audit and the big four popping up at every turn in the company’s chequered history,' he said.

'Sadly, Capita goes on the growing list of firms we are investigating to see if their conduct has endangered current and future pensioners’ rights.'

Jefferies analyst  Kean Marden, who rates the shares a 'buy' said today's news was likely to cut 2018 earnings by around 40%.

Shore Capital's Robin Speakman, who has a 'sell' rating on the shares, welcomed the new chief executive's changes.

'We, and others, have discussed the probability and requirement for such action, investing in the group's future,' he said.

Peel Hunt analyst Christopher Bamberry, who rates the shares a 'hold' also welcomed the shift.

'The focusing of the group on a small number of better competitively positioned businesses, with a strengthened balance sheet, allowing appropriate levels of investment, are welcome steps in the right direction,' he said.

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Comments  (32)

  • Andrew Stevenson: 

    "Woodford Investment Management said in its latest update to investors in the Income Focus fund that he had bought more shares in the group in December,"

    When exactly do they stop calling him 'star fund manager' ?

    12:39 on 31 January 2018

  • Alastair Kendall: 

    indeed

    15:21 on 31 January 2018

  • bar chid: 

    Andrew

    You are quite correct, in fact the pair of them are surely yesterday's men.

    Pride comes before a fall & doubling down on duds is often a swift way to precipitate that fall.

    As a rule of thumb the more FM's court publicity the less time they spend on their day job.

    15:22 on 31 January 2018

  • Ian Gregory: 

    I think I have nearly had enough of him.Having worked for an outsourcing company I can tell you they are rubbish anyone can manage even when you know nothing about the industry is there belief.Unfortunately it soon starts to fall apart.Early retirement I'm off was my answer.

    16:01 on 31 January 2018

  • Duncan Bland: 

    I have had some doubts about Woodford for some months now, "cautious" is no longer an appropriate description of his investment style. He seems to take bigger and bigger risks with each passing month. Buying more shares in Capita was not a sensible move in my opinion. I company that is known as "Crapita" to all its customers is clearly not serving its customers well!!

    16:17 on 31 January 2018

  • joseph o neill: 

    Agree,needs to spend a lot more time analyzing the stocks he owns& be more skeptical of what he's been told !!.

    16:18 on 31 January 2018

  • JohnR: 

    Woodford made his reputatuion by shunning sectors at key stages in the so called market cycle, thus avoiding many of the problems his funds now appear to be dogged by.

    Is he losing touch with that MO or is it simply that he's had an immense run of luck that's finally hit the buffers?

    I'm holding EDIN and going to stick with it but would be quite content to see the current manager, who apes Woodford imo, clear off.

    16:33 on 31 January 2018

  • richard tomkin: 

    Does he do enough due diligence ? As they say,always do your own research.

    17:51 on 31 January 2018

  • Mr Helpful: 

    Would Woodford be overweight or underweight Capita v a tracker or the market?

    18:26 on 31 January 2018

  • Mark Stringer: 

    It gets better in the context of the wider recommendations arena, apparently only 2 out of 16 analysts had Capita as a sell before this morning.

    19:54 on 31 January 2018

  • Dave King via mobile

    So much reliance on good governance gives us Imp but not BAT, Astra but not GSK. Am not confident we're picking winners anymore. .... and why would you ever ditch HSBC!!

    20:12 on 31 January 2018

  • JohnR: 

    It is strange, given their reputation goes before them, Crapita..

    Wasn't it only quite recently they'd had to be hand held by civil servants bussed in to get hopelessly delayed benefit payments out to those most in need, some of whom died before receiving a penny.

    Bashing the unfortunate has become a national sport under the nasties, that's probably why it slipped under most folks radar, which in essence only extends to whatever was on news at ten last night anyway..

    After today Crapita has a UK250 weight of around 0.5% of the 250 index give or take, depending where you get the figures from.

    Woodford holds 0.89% in his equity income fund and 1.39% in his income focus fund as of today, according to his rather nice (it has to be said) website. It's not clear if that's pre or post crash though.

    Doesn't shed much light on anything but thought I'd post it anyway.

    20:31 on 31 January 2018

  • Mark Stringer: 

    JohnR, The irony of the incompetents;civil servants, councils etc helping out Capita. Two sides of the same coin.

    22:12 on 31 January 2018

  • Sage: 

    I would ask the same question as Richard Tomkin, 'does he do enough due diligence' ? Woodford's largest holding in the equity income fund, Imperial Brands, down 21% last twelve months, Provident Financial, another top ten holding, down 75%, Prothena, another top 10 holding, being shorted by an American Hedge Fund. Worrying and not good.

    In recent interviews and statements Neil Woodford does not seem to provide the same in depth exposition that Terry Smith provides when he is giving an analysis of his Fund's holdings. Woodford seems to be more into themes rather than detailed analysis of individual Companies and hence the reason why he keeps being tripped up by some of his holdings

    22:36 on 31 January 2018

  • J Thomas: 

    Capita was my only loss making share over the last two years; I lost 58% selling out at £4.60 last November, which ironically seems now to have been a good move.

    It just goes to prove a quality share is never too expensive to buy ( Amazon, Berkshire Hathaway A, Blue Prism ), or a dog too cheap to sell ( Capita, Provident Financial, and many others.)

    23:07 on 31 January 2018

  • Bestmate: 

    I have sold all of my Woodford holdings whilst some small profit remained.

    End of story for me.

    18:59 on 01 February 2018

  • ROGER HULME: 

    I don't blame you Bestmate. I got out of Woodford Equity Income at a small profit but am losing almost 20% on Woodford Patient Capital - wish I hadn't bothered.

    Woodford seems to be taken for a ride by some companies he invests in.

    The same thing happened to Anthony Bolton when he tried his luck in Hong Kong. I sold out at a loss on that one as well - although it has since recovered under a new Manager.

    How the mighty are fallen!

    I'm sticking with Terry Smith though and might increase my holding which has almost doubled.

    10:10 on 02 February 2018

  • Mark Stringer: 

    Roger Hulme, be careful about the next "big thing" in the guise of Terry Smith after all wasn't Woodford once the next "big thing".

    10:34 on 02 February 2018

  • ROGER HULME: 

    So WHO do we trust/back?

    10:43 on 02 February 2018

  • Mark Stringer: 

    No one (trust) and accept that shares/funds are gambling and each way bets are a rarity with shares.

    "Back", well, in any event we are gambling once that money leaves our accounts

    Trust is one thing but when I hear that funds have doubled and the basis for buying more is the past performance and combination of ire at losses elsewhere. Isn't that the time to consider banking your profit or at least some of it.

    Maybe Smith is the current Messiah.

    Isn't most investing about the psychology of believing you will get more back and mentally keep doubling up if that is what you have achieved unless you are one of the insider traders on a sure thing.

    Woodford never made any promises but still the media kept picking at that past performance thing.

    Just about everything he has touched of late has been a gamble.

    11:20 on 02 February 2018

  • kWIKSAVE: 

    Neil must be worried stiff in his heart of hearts. Roger Hulme try Evenlode Global Income, a new fund but with solid stocks.

    11:31 on 03 February 2018

  • Lilly: 

    Suffice to say. I used Capita to negotiate (farmed out to a well known agent) a rent review with Lloyds bank. Capita were so careless that in the end they were too ashamed to even invoice for their work.

    Is this the second Carillion in the coal mine?

    12:29 on 03 February 2018

  • Nicholas Kendal: 

    All good reason to keep a wide and balanced portfolio to dilute the losers and enjoy the winners. I added Woodford Equity to my portfolio in June 2016 and it's currently 5% up despite the Capita fall. Not great, but not a disaster either - yet! I'm keeping faith for the moment.

    Woodford recommended Imperial Brands as greatly undervalued last autumn, having fallen 20% ytd without logicical reason other than 'being out of favour' so I bought a chunk in November - it's fallen 6.6% since then, but that just takes it further ot of line with a long history of delivering constant growth performance, with total returns growth way higher than equity value growth over the last 20 years and it pays a 6% dividend - so I'm keeping long-term faith with Imperial Brands too. We'll see.

    14:11 on 03 February 2018

  • retired investor 2: 

    Gave up on Woodward Equity Income last year. Luck, in timing and choice of investment seemed to run out for this fund. While some might prefer to hang on hoping it will turn round, my preference was to move on. As always my guess may in a year or two prove either prescient or too shortsighted.

    15:12 on 03 February 2018

  • Bestmate: 

    @Nicholas Kendal

    I was 7.2% up when I bailed out, down from a high, for me, of 17.80%. I simply did not want 3.5 years of owning the fund to turn into a loss. I had been concerned with performance for a long time but hung on stupidly, I was in truth, probably still un peu amoureux with the NW hype. It is a well known fact that with private investors, emotions play a significant part. As a result, it is so much more difficult to sell, than to buy. You do not want to admit you were wrong, you think of the hours of research going into the original buying decision, you in effect, make excuses not to act. This was a no brainer in the end, simply too much evidence stacking up, from possible personal overstretch to creeping recklessness in selection. Standing squarely at the bottom of all sector league tables for a very long time, and being beaten by every sector tracker fund, then, if I have missed something, so be it. I'm out.

    15:13 on 03 February 2018

  • Roy Harding: 

    Switched out of my last Barnett/Woodford fund today (Focus).

    Expect to make a loss ~ 5% less dividends received.

    How large would that loss be if the Focus fund was an Investment Trust rather than an OEIC?

    17:11 on 03 February 2018

  • Raj K: 

    He has too many holdings. There is no way you can be a good judge of 126 COMPANIES

    08:31 on 11 February 2018

  • Mark Stringer: 

    Doesn't this simply make for a great way of realising the past performance nonsense is simply that-nonsense in the scheme of future returns.

    I've yet to read any of the wise sages tell anyone what next week, next year or next decades returns will be.

    There are dozens of "I've held these for 20 years and with dividends.......

    it is all rear mirror commenting.

    Surely, this "correction" is testament to that.

    Can anyone reliably tell me, when does a correction become a crash.

    09:05 on 11 February 2018

  • Nicholas Kendal: 

    Mark Stringer

    A definition could be that a crash is a 20% fall, which if sustained is supposedly when a bull market becomes a bear market. They say a correction is a 10% fall which is roughly where it stops.

    On average for the S&P 500, a 5% correction occurs about every 7.2 months and a 10% correction might be expected at least once every 26.1 months.

    https://www.equities.com/news/historical-look-at-market-corrections

    14:20 on 11 February 2018

  • richard tomkin: 

    What is a 15% fall? A bad correction,or a shallow crash ? A lot of this terminology is pretty meaningless.

    09:08 on 12 February 2018

  • Nicholas Kendal: 

    richard tomkin

    I guess the terminology is based on historic experience of falls : -10% to - 19% being a correction range and -20% indicating an approaching bear market period.

    09:42 on 12 February 2018

  • Alastair Kendall: 

    We're doomed Capt Mainwaring

    10:36 on 12 February 2018

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