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Capita PLC

Capita plc - H1 2020 Market Update

LEI no. CMIGEWPLHL4M7ZV0IZ88

CAPITA PLC

H1 2020 MARKET UPDATE

25 June 2020

Summary

, Chief Executive Officer saidJon Lewis

“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 £19m healthcare decisions contract with a regional service. We expect revenue for the half year, including the impact of COVID-19, to be up by around c£2m.UKNHS

People Solutions – HR Solutions, and Army Recruitment have been stable but Learning and Resourcing have been hard hit. There has been a small benefit from our work for Returners and some eLearning contracts. We are pleased to have renewed the Teachers’ Pension Scheme for another four years, worth £60m. We expect revenue for the half year, including the impact of COVID-19, to be down by around £30m.Pensions AdministrationNHS

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 call centre and DWP support. We have won a major new piece of work from a retail bank worth £33m over three years. We expect revenue for the half year, including the impact of COVID-19, to be down by around £10m.NHSUK

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 schemes. We were pleased to have been awarded the scheme contract extension worth £114m over three years. We expect revenue for the half year, including the impact of COVID-19, to be down by around £60m.NHSMinistry of Justice Electronic Monitoring

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 £24m 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 £35m.

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 £40m.

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 for £56.5m and this transaction is due to complete shortly.Access UK Limited

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 £832million, made up of £402m representing the undrawn part of credit facilities and £430m of cash net of overdrafts. We will be repaying £165m of private placement notes when they mature on 30 June. We estimate that liquidity at 30 June will be more than £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.2

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

   

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 , and , as well as over 700 independent schools in the and worldwide.EnglandWalesNorthern IrelandUK

Other ESS products include Unit-E (used by 130 FE colleges) and Agilit-E (30 universities in the and ), as well as Reading Cloud (a library management system used by 15,000 schools).UKIreland

In 2019 ESS’s revenue was £95m and adjusted EBITDA was £49m.

Conference call

There will be a conference call for analysts and investors at 0830 on Thursday 25 June.th

Pre-registration link for participants:

https://www.incommglobalevents.com/registration/client/4403/agm-market-update/

Participant dial-in details:

0800 640 6441 United Kingdom

(Local) 020 3936 2999 United Kingdom

All other locations +44 20 3936 2999

Access code 795493

For more information please contact:

Tel: 07989 665484 Email:Investor enquiries


Stuart MorganIRteam@capita.co.uk

Capita external communications Tel: 0207 654 2399 Email:Media enquiries


media@capita.co.uk

--  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
        o 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
        o We have recorded contract wins, extensions and renewals such as , 
        o COVID-19 impact:
              --  resilient performance in the majority of our operations from
                  long-term contracts with a stable government and blue-chip
                  customer base;
              --  COVID-related DWP and  call centre work;
              --  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 £45m 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 £120m benefit from
        Government VAT deferral scheme, has provided support to liquidity
        facilities of £602m
    --  We continue to expect to remain compliant with debt covenants at H1
    --  Simplifying the software portfolio and strengthening the balance sheet
        o Focusing our software capability where aligned to existing consulting,
          digital BPO services and vertical markets
        o Sale of Eclipse Legal Services due to complete shortly
        o Decision to commence process to dispose of 
          Solutions
        o Proceeds will significantly strengthen Capita’s balance sheetIrish
          WaterTeachers Pensions and Ministry of Justice Electronic MonitoringNHSEducation Software
£m                        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
£m             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
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