Summary: Capita shares collapse after latest profit warning and cash call
Time for a recap.
Just two weeks after the collapse of Carillion, outsourcer Capita has shocked the market with a hefty profit warning, a £700m cash call on shareholders and the axing of its dividend.
The kitchen sink move by new chief executive Jonathan Lewis saw Capita’s shares collapse by 47.5%, wiping around £1.1bn off the company’s stock market value. Capita dominates the UK outsourcing market, and since January 2015 it has won contracts from 292 distinct public sector buyers.
A link to the full announcement from Capita can be found here.
The Labour party called on the government to put Capita under close review, but a spokesperson for the prime minister denied the company was another Carillion.
Frank Field, chair of the Work and Pensions Committee, raised concerns about Capita’s pension deficit.
Meanwhile few City analysts spotted the problems at Capita, according to their share price recommendations as collated by Reuters. But hedge funds had been shorting the shares.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Ken Odeluga, market analyst at City Index, says Capita has become another lightening rod for misgivings about outsoucing and public-private finance, but agrees it is not another Carillion:
An important difference between Capita and Carillion..is that the latter’s problems are linked to under-bidding on major contracts but Capita’s originate in routine services. Capita specialises in IT solutions for banks, the National Health Service, retailers and other sectors. Its string of profit warnings over the last few years stems from clients delaying new deals after Britain’s vote to leave the European Union. Consequently, the group has been forced to undertake a painful process of simplification. It had previously depended on acquisitions as the main driver of revenue for years.
Another key difference between Capita and Carillion is that Capita generates lots of cash. It ended its last full year with £408m. On that basis, insolvency does not beckon for Capita. However the group is still subject to the same concerns as Carillion. Namely low- (or even zero) margin for contracts for increasingly cautious businesses amid political risk.
The ‘unknown’ could assail Capita as savagely as Carillion too. Most of its non-current assets were intangibles at the end of 2016 and two-thirds were ‘goodwill’ linked to acquisitions. These were the last reliable accounts of assets and liabilities before the group began a root and branch review.
So, to be clear, Capita’s lenders will remain on side whilst it keeps generating cash and staying within leverage limits—as it has done to date. Beyond those limits, its future is uncertain. For that reason, we think stock price support will be less evident for Capita than selling interest for the foreseeable future. With 4% of shares out on loan, according to FCA data, Capita is a big short. Flimsily positive news could trigger a rush for cover, and an upward spike. The stock is down 84% in two years, near 15-year lows, and certainly oversold. However, we still expect any bounces to be sold, until the group can offer more clarity on growth and profits.
Capita’s share price agony is over, for today at least.
It has closed at 182.5p, down 165.3p or 47.5%. Not quite at the low of the day, when the shares hit 181.15p.
That means around £1.1bn has been wiped off the company’s stock market value today.
Here’s our updated story on Capita, by Angela Monaghan and Graeme Wearden:
Nearly £1bn has been wiped off the value of the government contractor Capita after the company issued a shock profit warning, axed its dividend payout to shareholders and said it needed to raise £700m to put its finances back on track.
The grim state of Capita’s financial position emerged just two weeks after the collapse of the construction firm Carillion.
In the latest blow to the outsourcing sector, Capita’s new boss unveiled a radical overhaul of the group’s finances, and gave a damning assessment of the company, which he said had become “too complex” and lacking in discipline.
Jonathan Lewis, who took over as chief executive in December, said the company needed to raise up to £700m through a cash call on shareholders. He also plans to scrap dividend payouts to save £210m and sell parts of the business to raise cash. A cost-cutting programme is expected to result in job losses among the 67,000 Capita employees, 50,000 of whom are in the UK.
The full report is here:
Earlier this month, Capita’s new boss met City analysts and seems to have made a good impression. He put forward his plan to streamline the business, but there does not appear to have been much talk about a fundraising, judging from what was reported afterwards. In a hold note on January 18, Stifel analysts said:
The company hosted an informal meet & greet with new CEO Jon Lewis last night. First impressions are positive. It is still early days in Mr Lewis’s tenure and there is plenty of strategic work for him and his team to undertake but he gave some strong hints regarding the direction of travel: a simpler, more agile business, focused on depth of expertise as opposed to breadth. He signalled core ares of interest could be customer management, HR and software services. Disposals will happen and in time international expansion will be pursued. No doubt, Mr Lewis’s view of what Capita should stand for will evolve as he works his way though the business but as a starting point we welcome any attempts to make the business more streamlined, less opaque and by extension easier to understand.
... The new CEO has sketched out some initial thoughts as to the direction of travel which is helpful but we need to have more information on the future shape of the group to take a view on the potential value that can be created for shareholders.
Numis was so enthused it issued a buy note after the meeting:
We had a positive initial meeting with new CEO, Jonathan Lewis. It is easy to be critical of the past, but his observations on some of the structural and cultural issues at Capita highlighted some fundamental problems, but also material opportunities. We were encouraged by his comments on the need for great focus, cost reductions (whilst also re-investing for growth), and need to focus on cash.
No recovery for Capita. Its shares are now down 46% at 187p.
Just got this email. An unmissable opportunity for outsourcers such as, erm, Capita. pic.twitter.com/9NO2zFue8s
— Garry White (@GarryWhite) January 31, 2018
More from the City on Capita. Analyst Kean Marden at Jefferies called today’s announcement a “kitchen-sink” job by the new chief executive:
Jon Lewis arrived at Capita last September and has issued a stark initial assessment of the company’s shortcomings this morning.
Our initial calculations suggest that 2018 full year consensus earnings per share estimates, once analysts have included rights issue and bonus factor adjustments, could decline by around 40% today. In the medium term, cost savings should help (we think £85-90m could be achievable) but the revenue environment remains lacklustre.
Peel Hunt’s Christopher Bamberry said:
The focusing of the group on a smaller number of better competitively positioned business, with a strengthened balance sheet, allowing appropriate levels of investment, are welcome steps in the right direction. 2018 pretax profits expectations have been significantly reduced.
Rory McKenzie at UBS said:
With a new chief executive in place, 2018 was always going to be a significant transition year for Capita – todays’ announcement however outlines the scale of the challenges ahead...
Capita has i) guided to a 25-33% downgrade to 2018 consensus; ii) suspended the dividend (we think the market was braced for some form of cut already), iii) announced a rights issue planned for 2018 (underwriting in place for up to £700m, i.e up to 30% of pre today’s market cap) and iv) announced a non-core disposal programme over the next 2yrs. Capita aims to come back with a full strategic review in 2018 with more details, but for now the pressures look challenging. Consensus EPS for FY18 could fall around 30-50% including the impact of the rights issue.
Updated
UK government: Capita isn't the next Carillion.
Theresa May’s spokesman is trying to calm fears that Capita could be heading the same way as Carillion, the outsourcing firm which fell into liquidation two week ago.
Reuters has the details:
The British government monitors the financial health of all its strategic suppliers and does not believe that any, including Capita, are in a comparable position to Carillion, a spokesman for Prime Minister Theresa May said on Wednesday.
“Broadly we monitor the financial health of all our strategic suppliers, including Capita, and we are in regular discussions with them regarding their financial position,” the spokesman told reporters, after Capita shares fell sharply on news of a restructuring. “And (I would like) to emphasise we do not believe that any of our strategic suppliers including Capita are in a comparable position to Carillion.”
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Here’s further confirmation of Capita’s grip on the outsourcing market:
Since January 2015, #Capita has won contracts from 292 distinct public sector buyers - more buyers than any other supplier pic.twitter.com/a5kKQIx53V
— Tussell (@tussell_UK) January 31, 2018
This list shows how Capita holds a wide range of public sector contracts:
Runs government helplines for:
• The state pension
• Jobseeker's Allowance
• National Insurance number allocation
• Winter fuel allowance
Transport:
• Operates London congestion charge
• Manages wifi services for Transport for London, including free public access on London Underground
• Provides IT infrastructure services for UK air traffic control
• Planning for 10km of cycling routes in Salford
NHS/health:
• Provider of blood transfusion systems to some hospitals
• Manages communications between the NHS and its suppliers, vetting firms on data security standards
• Provides online payment systems to some NHS trusts
Pensions:
• Runs the teachers’ pensions scheme
• Works on behalf of the pensions regulator on the automatic enrolment of staff into company pension schemes
Other:
• Army recruitment
• Electronic tagging of offenders in England and Wales
• Operates the Gas Safe register for the Health and Safety Executive
• Carries out disability workplace assessments
• Operates the BBC licence fee
Frank Field MP, Chair of the Work and Pensions Committee, has Capita in his spotlight.
Field says:
“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.
Sadly, Capita goes on the growing list of firms we are investigating to see if their conduct has endangered current and future pensioners’ rights.”
Field’s committee, which has previously examined the collapse of BHS, opened an investigation into Carillion two weeks ago.
Ian King, Sky News’s business presenter, has written an interesting blog post on Capita’s profits warning.
He makes two points:
The first is that this is textbook stuff from an incoming chief executive.
Jon Lewis, who has only been in the job for two months, has seized the opportunity to re-set expectations for the business while the blame can still be pinned on his predecessor, Andy Parker, who stepped down last September, after three and a half years in the job following a string of profits warnings.
No-one will blame Mr Lewis for today’s announcement.
Instead, while the news has cratered the share price, Mr Lewis will earn brownie points with investors for taking tough remedial action to sort out Capita’s problems.
The company has, in the past, taken on more work than it can handle and, accordingly, has become, as the new boss notes, too complex.
The second conclusion, which is difficult to avoid, is that Mr Lewis has observed recent events at Carillion and is now seeking to avoid similar risks.
More here:
Some thoughts from me on today's profits warning from @CapitaPlc https://t.co/FNNzhh8oCW
— Ian King (@IanKingSky) January 31, 2018
Andrew Brooke, analyst at Royal Bank of Canada, has chewed through Capita’s profit warning - and concluded that it’s “clearly a mess”.
He adds:
Too many uncertainties for us and it’s tough to raise money when you don’t have a strategy yet.
Over at parliament, Labour MP Ian Mearns has raised the issue of Carillion’s collapse two weeks ago, at Prime Minister’s Questions.
Mearns says Carillion workers and apprentices in his Gateshead constituency face an uncertain future following the company’s collapse.
He asks the government to act to prevent future “corporate theft” where “pirate directors” siphon off money that should have gone into pension funds and using it to pay dividends and bonuses.
Cabinet Office minister David Lidington (who has stepped in as Theresa May is in China) says good progress is being made in finding new position for former Carillion apprentices.
He says the government won’t pre-empt the Official Receiver’s inquiry into Carillion, but adds that the government will publish proposals later this year to stop directors “siphoning off” pension funds.
My colleague Andrew Sparrow is tracking all the PMQs action:
Capita’s problems mean local and national procurement officers face a tricky decision.
They might be tempted to shy away from the company, following today’s profit warning.
But Sky News’s Adam Parsons points out, such a policy would leave councils and government departments with nowhere to turn:
On Capita: Government can't stop giving infrastructure contracts to everyone who delivered a profits warning. The whole process would grind to a halt, the industry would collapse.
— Adam Parsons (@AdamParsons1) January 31, 2018
Carillion wasn't just warning - it was dying
Matt Cockbill, head of the IT and digital leadership practice at Berwick Partners, argues that Capita’s team are making some “radical overhauls”.
“Change is an accepted part of business and we need only look at Carillion as an example of where action was taken too late in the day.
“Any organisation that recognises that it’s position is weakening and takes proactive and pragmatic steps to understand why - before filling the voids, assessing market impacts and managing the risks will prosper. In some cases this calls for the help of change leaders, and while Capita is in the early stages, its chiefs seem to be taking steps in the right direction.”
Capita was founded in 1984 when ex-local government officer Rod Aldridge led a management buyout of the business from the Chartered Institute of Public Finance and Accountancy. At the time it had 33 employees.
The company joined the stock market in 1991 and became a member of the FTSE 100 in 2006.
In the same year Aldridge resigned as executive chairman after it was revealed he had lent the Labour party £1m. He denied suggestions the loan had any influence on the company winning government contracts but said he would step down to avoid any further controversy.
He was replaced by Paul Pindar who became one of Britain’s best paid businessmen, earning £2.5m in 2012. He stepped down from the group in 2014 to move into private equity.
Capita grew largely through acquisitions, but a series of profit warnings saw it lose its place in the FTSE 100 in March 2017.
• Employees: 67,000 (About 50,000 based in the UK)
• Revenue (2016): £4.9bn
• Pre-tax profit (2016): £475m
• Proportion of business in public sector: 47%
• Dividend payout (2016): £210m
• Net debt (expected at end of 2017): £1.15bn
• Pension deficit: £381m
• Share price peak: £13.26 July 2015
• Share price now: 196p
• Market capitalisation at peak: £8.8bn
• Market capitalisation now: £1.3bn
Few City experts had spotted the full state of the problems at Capita.
According to Reuters data, nine analysts rated Capita as a ‘hold’, while just two recommended selling the company.
One had it as a ‘buy’, while two optimists reckoned Capita was a ‘strong buy’ (they presumably have some explaining to do this morning).
Even star investor Neil Woodford has been caught out. He recently increased his holding in Capita, having spotted the potential for “significant value creation”. Morning Star has more details.
Panmure Gordon called it right, though:
Michael Donnelly, @PanmureGordon support services analyst has had a sell on Capita since January 2016 when price was £11.60. Today trading at £2.25. I know sell-side get a bad rep but 👏👏
— Simon French (@shjfrench) January 31, 2018
There may be champagne corks popping in Mayfair today.
Capita (like Carillion) had been a target for hedge funds who had bet against the company by ‘shorting’ its stock (by borrowing it, selling it, and planning to buy it back at a profit).
Any speculator who shorted Capita in recent months will be sitting on a decent profit.
#Capita short sellers are in heaven today... short interest about 8% of free float https://t.co/PYhWYC1e7X @markets pic.twitter.com/eBo5LbUp8N
— Trista Kelley (@trista_kelley) January 31, 2018
Capita’s profits warning has hit shares in other outsourcing companies:
Outsourcing sector wobbles slightly after Capita slumps 43%: Serco (-3.9%); Interserve (-1.9%) Kier (-1.3%); G4S (-1.1%)
— Garry White (@GarryWhite) January 31, 2018
In today’s statement, CEO Jonathan Lewis warns that Capita has seen “delays in decision making and weakness in new sales” since December; a sign that the market is deteriorating?
Helal Miah, investment research analyst at The Share Centre, says Capita’s new boss, Jonathan Lewis, is trying to avoid suffering Carillion’s fate.
Miah writes:
“Another government contractor appears in trouble, but at least Capita are making drastic changes before it’s too late. With a new CEO in place for less than two months, it should be no surprise that the troubled group has today announced a deep restructuring programme.
This comes after a review of the business by the new management which found that the group has underinvested, has a short term focus, is too focussed on acquisitions to drive growth as well as lacks operational discipline and financial flexibly.
Miah add that Capita could become another “hot political issue”, given its critical role in local and central government.
The government have already placed other companies on watch after the Carillion fiasco; no doubt some will say that Capita should be on that list too. The sector in general hasn’t had a great few years and this has been exacerbated by Brexit where contract awards have been delayed due to uncertainty.
Updated
Capita shares hit 15-year low
Terms like ‘plunged’, ‘nosedived’ and ‘crashed’ get banded about too easily in the City.
But in Capita’s care, they’re fully justified.
Shares are now down an alarming 45% at just 190p, which is the lowest level since January 2003.
This means that Capita is now worth just £1.3bn. That’s barely more than its net debt, which is estimated to be £1.1bn.
News of a stonking profits warning, a £700m rights issue and the suspension of the company’s dividend have sent investors racing to get out.
Michael Hewson of CMC Markets says:
This is a bold move by new CEO Jonathan Lewis and the fact that he thinks that this sort of restructuring is necessary, speaks volumes to the current sentiment around the outsourcing industry in the wake of Carillion’s insolvency.
Concerns over debt levels and pension deficits, along with the over-diversification of the business appears to have prompted this significant slim lining approach.
Hewson is also concerned by the pension deficit, which seems to have swelled sharply recently.
In 2015 it stood at £188m, and was estimated to be £381m as of June last year, with management undertaking to set aside an extra £21m in 2018 to get this number back down. In light of the problems exposed at Carillion the big jump in this number is a particular concern and exposes some particularly uncomfortable truths about shareholders holding management to account.
Here’s an excellent chart from Tussell, the data firm, showing how Capita dominates the UK’s outsourcing sector:
On mornings like today @tussell_UK are the guys for the best data on UK public sector contracts. 226 awarded to Capita in last 2 years. More than ten times the number awarded to Carillion over the same period. pic.twitter.com/HmeHdR97Do
— Simon French (@shjfrench) January 31, 2018
Britain’s trade unions are also alarmed by this latest crisis in the UK outsourcing sector.
TUC General Secretary Frances O’Grady has echoed Labour’s call for the government to act now.
She says:
Today’s profit warning from Capita is really worrying.
“That’s why the TUC is calling for an urgent risk assessment of all large outsourcing firms. It’s essential the government completes this quickly and is prepared to bring services and contracts in-house if they are at risk.
“We can’t afford another Carillion.”
Labour: Privatisation dogma is failing
Jon Trickett MP, Labour’s Shadow Minister for the Cabinet Office, has urged the government to put Capita under close review.
Trickett says:
“We cannot afford another Carillion. The Government must take serious steps to oversee the activities of Capita, which is the third major outsourcing company in the last month to issue profit warnings.
“The Tories’ privatisation dogma risks lurching our public services from crisis to crisis, threatening jobs, taxpayers’ money and leaving people without the services they need.
“The Government must end its ideological attachment to private profit in public services and instead start putting the public interest first.”
Capita CEO Jonathan Lewis has been speaking to City analysts.
He warned that overhauling the outsourcing group would take at least two years, admitting there is “much to be done”.
Lewis says he wants to fix the “sins of the past” by pumping more money into IT and automation. Today’s moves are the “first steps” on the road to recovery, he adds.
Capita’s share price is plumbing new debts. It’s now down 41% at just 204p, down from 347p last night.
Earlier this week, the Guardian’s Public Leaders Network warned that local councils were too reliant on major outsourcers.
Joanne Fry, a senior local government officer, wrote:
Carillion mainly ran large private finance initiative contracts – building hospitals, for instance. But firms like Capita, Serco and Veolia run a huge range of different council services, from IT and HR to waste collection, recycling, street cleaning and maintenance. If they were to fail, the risk to councils would be very high.
It has become increasingly clear that the business model around outsourcing – or managed services in local government speak – is fundamentally at fault.
More here:
Capita is also heavily involved in Britain’s pensions industry. It’s been running the UK’s Teacher’s pension scheme since 1996, and last October, it took over the administration of the Royal Mail’s pension fund.
It even has a contract with the UK’s pension regulator, to help roll out automatic enrolment (AE) to small and micro employers.
But closer to home, Capita also faces a pension deficit of its own, of around £380m.
Today’s statement says:
We are currently undertaking a triennial review of the pension scheme. Our current expectation is that the actuarial deficit after this review will be significantly below the last disclosed IAS19 deficit of £381m at 30 June 2017.
In addition to our annual contribution, we are committed to an additional contribution of £21m in 2018.
We will seek to reduce the remaining deficit as a priority.
Updated
Earlier this month, my colleague Nick Fletcher ran the rule over the outsourcing industry, following Carillion’s slump into liquidation.
He wrote:
About half of Capita’s annual turnover of £4.9bn comes from central and local government work, ranging from administering the teachers’ pension scheme to providing tech services to the NHS, electronic monitoring services and running the Gas Safe register for the Health and Safety Executive. It has 50,000 UK employees, and a net debt of £1.6bn compared with its market value of £2.8bn.
The company’s shares have lost two-thirds of their value over the past two years after a series of profit warnings and boardroom changes.
Updated
Bloomberg points out that Capita doesn’t only run public sector services. It also provides customer service and IT services for some of Britain’s biggest companies.
For example, earlier this month it won a new five-year contract with Marks & Spencer; last August, it extended a mortgage outsourcing deal with Tesco Bank.
Today’s share price tumble means Capita is now worth just £1.4bn -- or barely twice the £700m it hope to raise from the City later this year.
Capita now trading down 38%. Market cap now down to £1.43 billion with a £700 million rights issue ahead of it to deleverage balance sheet. New world post Carillion
— Paul Kavanagh (@PaulJKavanagh1) January 31, 2018
Natalie Bennett, former leader of the Green Party, says Capita’s problems show that essential public services shouldn’t be run by companies.
#Capita #privatisationfail - essential services are not safe in private hands. We've been shovelling money into tax havens, cutting pay & conditions of workers & quality of services, now this... https://t.co/LFsJWw8Oqw
— Natalie Bennett (@natalieben) January 31, 2018
The Spectator’s Fraser Nelson sees a trend emerging....
First, Carillion hit the rocks. Now... https://t.co/Aon2pBKWj6
— Fraser Nelson (@FraserNelson) January 31, 2018
Patrick Smith of BuzzFeed fears that Capita workers could be axed as the company races to cut costs.
Very frank profit warning from Capita CEO Jonathan Lewis, who only joined two months ago. "Cost-savings and disposals" doesn't sound like good news for staff. https://t.co/H6tNidPwbW pic.twitter.com/LdKhY2k3C1
— Patrick Smith (@psmith) January 31, 2018
It’s not for the faint-hearted, but you can read Capita’s announcement online, here:
Update on Capita’s transformation, capital structure, funding and trading outlook
Capita’s shares have crashed to their lowest level since 2004 this morning!
It’s a staggering fall from grace; back in 2015 Capita’s shares were worth over £13, now they are worth just £2.35.
Capita shares plunge 34%, their biggest fall on record, after company issues profit warning, suspends dividend and announces rights issue. pic.twitter.com/A3nJQTEy4M
— Jamie McGeever (@ReutersJamie) January 31, 2018
Analyst: Another blow to outsourcing sector
Capita’s financial problems will send ‘fresh tremors’ through the outsourcing sector, says Neil Wilson of ETX Capital.
He writes:
“Too complex, too diverse and just haemorrhaging cash – no we’re not talking about Carillion, but fellow outsourcer in a spot of bother, Capita.
New CEO Jonathan Lewis is having a proper clear out to fix the business before it heads the way of its erstwhile peer. He says the business is ‘too widely spread across multiple markets and services’, and that there has been ‘too much emphasis on acquisitions to drive growth’.
Wilson adds:
Signs of problems have been building. In December the shares took a dive as the first clear signs of weakness in 2018 were laid bare, although trading in the second half had just about held firm. The pipeline of new work had fallen to just £2.5bn from £3.1bn in September.
But it looks like things have got worse. In January there was more bad news as it lost a lucrative and profitable contract with the Prudential.
Capita's shares plunge
Capita’s shares have plunged by 30% at the start of trading, following this morning’s announcement.
The City is reeling from the triple-whammy of a profits warning, dividend suspension, and a looming £700m cash call.
Updated
This could be nasty...
drumroll please as we await the opening share price for Capita
— Katie Martin (@katie_martin_fx) January 31, 2018
This is why Capita’s financial problems are a big deal.....
Just in case you wanted to know what work Capita does for the public sector: teachers' pensions, electronic monitoring, Jobseekers' Allowance phone lines, even the gas safety register... https://t.co/kLjAd9k9fp pic.twitter.com/Jmp6fPSuMw
— Jon Yeomans (@JonLYeomans) January 31, 2018
Updated
Capita profits warning rocks City
Newsflash: Outsourcing group Capita has stunned the City this morning by announcing a big profits warning, and suspending its dividend to shareholders.
The company’s new chief executive, Jonathan Lewis, is also planning to raise £700m from investors to strengthen Capita’s balance sheet after a series of profit warnings last year.
In a brutally honest statement, Lewis says ‘significant changes are needed’ at Capita, which is one of the UK’s largest employers, providing a a wide range of public services in the UK.
In a damning assessment of the company, Lewis says:
Capita has underinvested in the business and there has been too much emphasis on acquisitions to drive growth. As our markets have evolved, the Group has not responded consistently to new customer demands. Since December, we have continued to experience delays in decision making and weakness in new sales.
Today, Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility.
Capita needs to change its approach. I have initiated a transformation programme, appointed a Chief Transformation Officer and formed a new executive committee to drive this change. I believe that this transformation programme can significantly improve the performance of Capita.
Capita now expects to make underlying pretax profits of between £270m and £300m in 2018, way below analysts’ average forecast of around £400m.
Lewis only took over at Capita on 1 December, and has clearly decided that wide-ranging and urgent action is needed.
As well as freezing payments to shareholders, and holding a cash call, he also plans to sell non-core operations and push hard for cost efficiencies.
An immediate priority is to strengthen the balance sheet through a combination of cost savings, non-core disposals and new equity. My initial review of our cost base highlights that over the next few years there is significant scope for cost efficiencies across a number of areas but also the need to spend more where there has been underinvestment.
This comes just two weeks after Capita’s rival, Carillion, lurched into liquidiation...
Reaction to follow....
Updated
The agenda: Markets under pressure
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The market are nervous this morning. After two days of selling on Wall Street, investors are wondering whether they’re seeing a healthy pullback, or the start of a more serious decline.
Yesterday the FTSE 100 shed 83 points, or over 1%, in a flurry of profit-taking and worries that government bond prices are also dipping.
Fiona Cincotta, senior market analyst at City Index, says the prospect of higher interest rates is hitting the bond market [bonds give a fixed return, so are more attractive in a low interest rate environment]
Cincotta explains:
Sentiment has been low across the board as prospect of rising interest rates is starting to weigh on the global optimism story, a story which had been boosting stocks to record high after record high.
The fear that interest rates may have to rise faster than markets had initially priced in amid concerns of faster inflation is starting to weigh on trading decisions.
Last night, Donald Trump used the State of the Union to applaud himself for the state of the US economy. As in Davos last week, he tried to sound statesman-like with talk of common ground and unity. As in Davos last week, he also attracted some boos - over immigration.
But he avoided any serious attacks on America’s rivals, which should reassure traders.
As Jasper Lawler of London Capital Group says:
There was no criticism of China or Russia and Trump even hinted at a willingness to work across parties.
However, in typical Trump style, there were few details on a potential $1 trillion infrastructure spend, which was a blessing in reality, because elaborating on this could have pushed the already high bond yields, higher.
Investors are also waiting to hear from America’s central bank, and Janet Yellen’s final meeting as chair of the Federal Reserve. The Fed isn’t expected to raise interest rates today, but Yellen hint about how the Fed sees the economic landscape.
Here’s the agenda:
- 7am GMT: German retail sales
- 10am GMT: Eurozone unemployment for December
- 10am GMT: Eurozone ‘flash’ CPI inflation for January
- 7pm GMT: US Federal Reserve statement on monetary policy
Updated
