Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Does Capita need a rights issue?
Outsourcer Capita (CPI), which suffered a shock profit warning (29 Sep), may need to ask shareholders for extra cash if earnings fall by more than expected.
The lion’s share of Capita’s 45% year-to-date decline came after a trading update last week which said it faced complications with a Transport for London contract, a slowdown in ‘specific trading businesses’ and delays in client decision-making.
Chief executive Andy Parker expects Capita’s ratio of net debt to earnings before interest and non-cash items (net debt/EBITDA) to hit 2.7 at its 31 December year-end. Some analysts are now speculating that if Capita’s profitability slips further, it may need to raise extra capital.
Red flags in Capita’s accounts have been regularly flagged by Panmure Gordon analyst Michael Donnelly, who is concerned about the company’s balance sheet, earnings quality, acquisition strategy and valuation.
Donnelly argues fellow outsourcer Babcock International (BAB) trades at a similar valuation to Capita and represents a less risky option.