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Capita trims growth forecast.

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London: UK public sector specialist The Capita Group suffered a 4% fall in share price last week after it trimmed growth forecasts for 2011.

However in an interim statement the firm said it remained confident of a good year, with reasonable growth and stable margins:

"Capita is having a successful year in respect of new major contracts and renewals, reflecting the operational track record of the Group and the demand for outsourcing across our target markets. Furthermore, we have made a series of acquisitions which are playing a key role in extending our capabilities and making a valuable contribution to our growth. However, this progress is somewhat counterbalanced by the prevailing pressure on spending which continues to affect adversely a small number of our trading activities and is also constraining discretionary additional revenue from existing clients. Taking these factors into account, we expect to achieve reasonable revenue growth for the full year and stable year on year margins.

"Our market leadership and track record continue to position us well in the outsourcing market. This is demonstrated by our strong performance to date in 2011 with 16 new and extended contracts totalling £1.26bn. New major contracts secured to date this year include:

  • Administration of the Teachers' Pension Scheme for a further 7 years;
  • Life and pensions contracts with MetLife and Zurich Financial Services Group;
  • Administration of vehicle tax and insurance evasion for the DVLA;
  • A collaborative partnership with the London Borough of Lambeth;
  • A contract with The Pensions Regulator to deliver employer education for automatic enrolment.

"We have a number of major bid decisions due in Q4 of 2011 and if we sustain our historic success rate over this period, we expect to deliver more than double the level of major wins secured in 2010 and indeed to have our best ever year in terms of major contract wins, surpassing the £1.89bn won in 2007.

"Our bid pipeline (which we announce twice a year at our half and full year results) is a snapshot of bids worth £10m or above, capped at £500m and where we have been shortlisted to the last four or fewer. In July 2011, we reported a record pipeline of £4.7bn which has been actively replenished following the bids won to date in 2011 and remains at record levels.

"Over the period to 31 December 2015, we only have two material contracts (defined as having annual revenue in excess of 1% of 2010 turnover) due for rebid — the contract for TV licensing in 2012, where the procurement process is in its final stages, and the CRB contract in 2013, where the bid process is now underway.

"We currently expect to achieve reasonable revenue growth for the Group for the full year 2011. As reported previously, the pressure on spending continues to constrain additional revenue generated from existing clients and impact a small number of our trading businesses, specifically property, resourcing and parts of our IT business. Our other businesses are trading steadily, recent acquisitions are making a valuable contribution to our growth and service delivery remains excellent.

"For the first half of 2011, we reported an overall organic revenue decline of 7% due to the combination of challenging trading conditions and an unusually high level of revenue attrition. As these conditions have continued in the second half of the year, we currently expect a similar level of organic revenue decline for the full year. Counterbalancing this, the contribution from 2011 acquisitions and those acquisitions completed in 2010 will add some 14% to 2011 revenue growth. We therefore currently expect the net effect of these elements to result in revenue growth of approximately 7% for the full year.

"We are maintaining good discipline across our other key financial metrics. We expect to contain capital expenditure at or below 4% of revenue, which includes our continued investment in a new share registration platform and life and pensions systems. As highlighted in July, operating cash flow has been impacted by the anticipated conclusion of the National Strategies programme and by additional working capital requirements for new and expanded contracts and (prior to receiving completion payments) for our Building Schools for the Future projects. As anticipated, these factors will continue to impact cash flow for the remainder of the year but we expect a return to more usual levels for the full year 2012."

Capita also gave details of acquisitions during the year so far.

"Acquisition activity has continued in the second half, enabling us to enhance our propositions to clients and extend our market reach. To date in 2011, we have acquired 19 businesses for a total cash consideration of £334m with 8 new deals undertaken since our half year results in July 2011, including:

  • NorthgateArinso's pensions administration and software business acquired for £27.5m, bringing new expertise and capacity to Capita Hartshead, the UK's leading administrators of occupational pension schemes;
  • AIB Group's international financial services and trust services businesses acquired for a combined consideration of £42m;
  • Vertex's private sector division for £40m, opening up new market opportunities in the private sector;
  • Cedar HR Software, a leading provider of human resource management software to UK policing acquired for £15m.

"Our focus is now on achieving the successful integration of these businesses and realising synergies. We expect our acquisition activity to slow going forward in 2012 as organic growth picks up.

"The market for large scale outsourcing has become increasingly active during 2011, as reflected by the strength of our major sales performance, bid pipeline and the prospect and suspect lists which underpin it.

"In the private sector, continuing pressure on organisations to drive down operational costs without compromising customer service is creating opportunities for outsourcing. We are particularly active in the UK life & pensions and wider financial services markets and continue to build our presence in the retail and utilities markets.

"In the public sector, the ongoing pressure to reduce budgets whilst maintaining front line services is creating a healthy pipeline of opportunities in local government and there are also a number of opportunities arising across central government.

Outlook

"We expect to achieve reasonable revenue growth and stable year on year margins for the full year 2011. Our strong major contracts sales performance, the contribution from acquisitions in 2011 and our buoyant bid pipeline will support stronger revenue growth in 2012.

"We continue to believe that the significant pressure on both public and private sector organisations to explore alternative service delivery models will drive long term demand for outsourcing and support our growth in 2012 and beyond."

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