Shares in Capita (LON:CPI) plunged this morning after the company warned on profits, and stated they are in dire need of fresh capital. The company is halting its dividend and seeking to raise £700 million in a rights issue – which has sent the share price down 39%.
The outsourcing company have declared that ‘cost saving and non-core disposals will not be enough’ – which is a red alert for investors, as it suggests the company is struggling with debt.
The CEO Jonathan Lewis plans to raise cash to pay down short-term debt and invest in long-term assets. The business has a steady revenue stream, but in times like these, cash is king. Mr Lewis aims to bring the leverage ratio down to, between 1.0 and 2.0 times net debt to EBITDA, and it is currently in the region of 2.8.
Servicing a relatively high level of debt and nursing a large pension deficit are the main issues here, but if Capita can trim down its liabilities and focus on a handful of profitable businesses it could turn itself around.
For some investors, today’s update from Capital will be reminiscent of Carillion as both companies have government contracts. Carillion collapsed but Capita Group are still in the game, and provided they undergo the necessary asset-stripping and capital raising, they could be on the road to recovery in the near-term.
We are expecting the Dow Jones to open up 77 points at 26,154, and we are calling the S&P 500 up 11 points at 2833.
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