Capita PLC H1 2020 Market Update
June 25 2020 - 2:00AM
UK Regulatory
TIDMCPI
LEI no. CMIGEWPLHL4M7ZV0IZ88
CAPITA PLC
H1 2020 MARKET UPDATE
25 June 2020
Summary
* We have delivered a strong operational response to COVID-19 impact, working
with colleagues and clients to protect service delivery; 60% of our people
are working from home and 35%, who cannot work from home, are operating
safely from our offices and client sites that have remained open
* Revenue in H1 is expected to be around 10% lower than 2019, of which 5%
relates to COVID-19
+ A small decline in trading was expected in the first half due to
contract losses reported in 2019; the first quarter was broadly in line
with expectations
+ We have recorded contract wins, extensions and renewals such as Irish
Water, Teachers Pensions and Ministry of Justice Electronic Monitoring
+ COVID-19 impact:
o resilient performance in the majority of our operations from
long-term contracts with a stable government and blue-chip customer
base;
o COVID-related DWP and NHS call centre work;
o partially offsetting the impact of weaknesses in transactional and
volume-related revenue, such as travel, face-to-face training,
resourcing and enforcement.
* Cost savings of at least GBP45m already delivered in the first half to
mitigate financial impact; significant further cost savings to be delivered
in H2
* Improvement in cash generation, including around GBP120m benefit from
Government VAT deferral scheme, has provided support to liquidity
facilities of GBP602m
* We continue to expect to remain compliant with debt covenants at H1
* Simplifying the software portfolio and strengthening the balance sheet
+ Focusing our software capability where aligned to existing consulting,
digital BPO services and vertical markets
+ Sale of Eclipse Legal Services due to complete shortly
+ Decision to commence process to dispose of Education Software Solutions
+ Proceeds will significantly strengthen Capita's balance sheet
Jon Lewis, Chief Executive Officer said
"Capita and its people have, like thousands of other businesses, faced numerous
challenges and uncertainties over the past three months.
"But, thanks to the hard work and professionalism of our colleagues, we have
delivered a strong operational response to the COVID-19 crisis. This has only
been possible due to the actions we have taken over the past two years to
simplify and strengthen the organisation - to rebuild trust with clients, fix
legacy issues, improve contract execution, invest in our people, improve
systems and controls, reduce risk and cut cost.
"It means we have been able to deliver a resilient first-half performance,
underpinned by a large number of long-term contracts delivering critical
services to government and to a blue-chip, private sector client base.
"We have implemented cost and cash preservation initiatives to mitigate the
financial impact of COVID-19, while liquidity remains strong, and cash
generation from operations has improved significantly compared with 2019."
H1 trading and COVID-19 impact by division1
Software - We have seen resilience in the Education, Capita One and AMT Sybex
businesses but the payments business in particular has experienced a steep fall
in transactions in end markets. In March we secured a seven year GBP19m
healthcare decisions contract with a UK regional NHS service. We expect revenue
for the half year, including the impact of COVID-19, to be up by around cGBP2m.
People Solutions - HR Solutions, Pensions Administration and Army Recruitment
have been stable but Learning and Resourcing have been hard hit. There has been
a small benefit from our work for NHS Returners and some eLearning contracts.
We are pleased to have renewed the Teachers' Pension Scheme for another four
years, worth GBP60m. We expect revenue for the half year, including the impact of
COVID-19, to be down by around GBP30m.
Customer Management - We have managed to shift to remote working basis for over
70% of the division and so maintain high service levels to our clients.
Challenges have occurred in specific client end-markets (e.g. retail and
gambling). Opportunities to support COVID-related projects have arisen in NHS
call centre and DWP support. We have won a major new piece of work from a UK
retail bank worth GBP33m over three years. We expect revenue for the half year,
including the impact of COVID-19, to be down by around GBP10m.
Government - Revenues have been resilient in many verticals: Health and
Welfare, Transport, Defence, Justice; but there has been an impact in Local
Government (parking, leisure centres, rates collection), Entrust (outdoor
education) and Fera (less testing from private companies). However, we have
also supported several COVID projects such as for the DWP and various NHS
schemes. We were pleased to have been awarded the Ministry of Justice
Electronic Monitoring scheme contract extension worth GBP114m over three years.
We expect revenue for the half year, including the impact of COVID-19, to be
down by around GBP60m.
Technology Solutions - Operations in the existing business have been broadly
stable but transactional revenue and new business have been affected. We have
seen increasing interest in automation as a result of COVID and the team was
responsible for Capita's successful move to remote working for 35,000
colleagues. During the period we have won a GBP24m one-year contract to implement
the TfL Emergency Services Network infrastructure. We expect revenue for the
half year, including the impact of COVID-19, to be down by around GBP35m.
Specialist Services - The division has been significantly impacted by COVID-19,
particularly in those businesses whose end markets have been severely affected
(Travel and Events, Enforcement, Real Estate and Infrastructure) and 30% of our
colleagues in this division are on furlough. We expect revenue for the half
year, including the impact of COVID-19, to be down by around GBP40m.
Consulting - we have been getting good traction in certain verticals such as
cyber and justice and the business is expected to grow this year. However, we
are now working in the most challenging markets in recent memory. We have
refocused the business to reflect this new outlook onto a smaller range of
vertical markets and capabilities. We look forward to accelerating growth as
demand picks up again in the future.
Simplifying the portfolio and strengthening the balance sheet
Following a strategic review of our Software division over the past year, we
made a decision to focus on a portfolio of core software capabilities which are
better aligned with and support our consulting, transformation and digital BPO
services, and the vertical markets of the rest of the Group.
We will retain our software assets that are catalysts for growing our other
services and plan to dispose of the standalone software products that have
little overlap or cross-sell with the rest of Capita.
As a result, we initiated the disposal of Eclipse Legal Systems ("Eclipse"), a
standalone legal process software product in January. Last Friday we announced
we had agreed to sell Eclipse to Access UK Limited for GBP56.5m and this
transaction is due to complete shortly.
We have also announced our intention to dispose of Education Software Services
("ESS") during 2020. ESS is a standalone provider of management information
system (MIS) software for the education sector.
Proceeds from both of these disposals will be used to strengthen the company
balance sheet by reducing net debt and pension liabilities. Further disposals
will be considered in due course.
Outlook
Precise forecasting is challenging in these uncertain times.
We expect trading over the rest of the year to remain resilient, given the
client base and the long-term nature of our contracts.
Before the benefit from Government VAT deferral scheme, we still expect cash
generation to improve compared to last year as cash from trading operations
improves and capital expenditure reduces. In addition, restructuring spend also
reduces.
The disposal of the Eclipse business and the planned disposal of Education
Software Services will strengthen the balance sheet and we are committed to
creating a more focused and sustainable Capita for the future.
Liquidity remains good. Liquidity at 23 June was GBP832million, made up of GBP402m
representing the undrawn part of credit facilities and GBP430m of cash net of
overdrafts2. We will be repaying GBP165m of private placement notes when they
mature on 30 June. We estimate that liquidity at 30 June will be more than GBP
640m when we take into account the effect of this debt maturity, further
operating cash inflows and the reduction in the backstop liquidity facility as
a result of the receipt of the Eclipse disposal proceeds.
The Board believes that, based on a wide range of scenarios reviewed by
management, our existing financing arrangements and mitigating actions taken
and planned provide sufficient liquidity and enable Capita to comply with its
banking covenants at the full year, and operate through these unprecedented
times.
Notes
1 Restated 2019 divisional revenue is disclosed in the table below
The tables below show the 2019 divisional adjusted revenue represented for
reorganisations during the first half of 2020. Neither have been represented
for business exits arising in 2020 or IFRS 16 Leases
GBPm Adjusted revenue
HY19 FY19
Software 177.9 359.9
People Solutions 271.6 542.5
Customer Management 585.1 1,181.7
Government Services 424.4 793.4
Technology Solutions 224.2 449.8
Specialist Services 143.2 295.7
Group Support Services 12.1 24.4
Total 1838.5 3,647.4
GBPm Software People Customer Government Technology Specialist Group Total
Solutions Management Services Solutions Services Support Group
Services
2019 Adjusted 375.4 500.5 802.4 777.9 429.3 744.5 17.4 3,647.4
revenue
Axelos - 47.6 - - - (47.6) - -
Capita - - - - 20.5 (20.5)
Intelligent
Communications
FERA - - - 36.2 - (36.2) - -
Irish BPO - - 36.3 - - (36.3) - -
Life & - - 265.2 - - (265.2) - -
Pensions
Mortgage - - 74.7 - - (74.7) - -
Services
PageOne (10.2) - - - - 10.2 - -
Tascor - - - (26.0) - 26.0 - -
Other (5.3) (5.6) 3.0 5.3 - (4.5) 7.1 -
Restated as 359.9 542.5 1,181.7 793.4 449.8 295.7 24.4 3,647.4
per 2020
structure
2 "Cash net of overdrafts" excludes cash required to be maintained for
regulatory purposes and cash held in joint venture companies
Notes to editor:
ESS is the largest management information system (MIS) provider in the market;
it provides 'back office' software and services for schools, as well as
universities and further education colleges.
SIMS - a proprietary, off-the-shelf MIS for managing pupil, staff and parent
data - is used in 21,000 schools in England, Wales and Northern Ireland, as
well as over 700 independent schools in the UK and worldwide.
Other ESS products include Unit-E (used by 130 FE colleges) and Agilit-E (30
universities in the UK and Ireland), as well as Reading Cloud (a library
management system used by 15,000 schools).
In 2019 ESS's revenue was GBP95m and adjusted EBITDA was GBP49m.
Conference call
There will be a conference call for analysts and investors at 0830 on Thursday
25th June.
Pre-registration link for participants:
https://www.incommglobalevents.com/registration/client/4403/agm-market-update/
Participant dial-in details:
United Kingdom 0800 640 6441
United Kingdom (Local) 020 3936 2999
All other locations +44 20 3936 2999
Access code 795493
For more information please contact:
Investor enquiries
Stuart Morgan
Tel: 07989 665484
Email: IRteam@capita.co.uk
Media enquiries
Capita external communications
Tel: 0207 654 2399
Email: media@capita.co.uk
END
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