Capita is undergoing a transformation under the leadership of Jonathan Lewis who was brought in as CEO in December 2017. Stuart Morgan, Head of Investor Relations, gave an update on this progress at the latest Yellowstone Advisory webinar which you can watch here. The first two years have been spent fixing underperforming contracts, improving customer relationships, building employee relations and improving trust.
2020 was supposed to be the year when the company returned to revenue growth and they were on track for this when COVID-19 hit and had a material impact on their operating environment. Consequently, revenue growth has been pushed back a year but they are rebuilding a strong pipeline of profitable contracts and emerging from the pandemic in good health. Key to this has been the cost savings achieved of £63m in the first half, out of a target of £100m, which they are confident of hitting for the full year.
COVID-19 has accelerated strategic decisions and increased the focus on disposing of non-core assets to enable the company to grow the parts of the business where they have a compelling advantage. At the same time this will strengthen the balance sheet. Stuart confirmed the company was confident of meeting balance sheet covenants at year end. In response to a later question Stuart confirmed this statement regarding the balance sheet was made before Capita entered into exclusive sale discussions for their ESS software business with Montagu Private Equity. Again, in response to another question, they are hopeful of updating the market on progress on this disposal in the near future.
The strategy Capita is pursuing is based around 3 pillars of Simplify, Strengthen and Succeed. The company is going to focus on their strongest divisions with the best growth and profit potential, they have invested in improving governance structures, people and technology. Success will be measured in terms of sustainable revenue growth and free cash flow.
Stuart reiterated that COVID-19 has had an impact on the transformation plan diverting attention to the health and safety of colleagues and ensuring client service levels were maintained whilst working patterns changed. Under COVID-19, given the uncertainties, cash preservation has been key and as such, the board and senior management have led by example with salary reductions and the cancellation of the bonus scheme.
Despite COVID-19 challenges this year, good progress has been made on the transformation program. The most troublesome underperforming contracts have been fixed. Huge headway has been made on the Army, NHS and Mobilcom contracts and these are expected to be profitable soon. The relationship with the NHS has also improved such that they are now winning new business from them. Elsewhere, operational improvements have been made and contracts have been renewed on better terms. The mindset has moved from revenue protection to revenue and margin improvement and the company is targeting higher margins from both existing and new contracts. The Navy training contract is worth £1bn and they will find out soon if they have been successful in the tender.
Some time was spent on the cost saving plan with over £63m of cost savings achieved in the first half out of a target of £100m for this year. There are four components to the plan: improving operational excellence; optimisation of the operating model and making best use of shared resources, investment in technology and leveraging the benefits of group procurement.
Non-core assets are for sale and proceeds will be used to strengthen the balance sheet. First on the block is the previously mentioned, off-the-shelf software business, ESS where a sale is currently being negotiated with Montagu. Stuart was hopeful that an update on the progress of this transaction could be made soon. Software will remain a key capability for Capita however, post any sale of ESS, and the development of software to support delivery of business services will be consolidated in the Digital Development Centre. The bulk of the other assets for sale are held within the Specialist Services Division. Pre COVID-19, the plan was to sell all of these assets together, but it is now much more likely that the individual businesses will be sold off in parcels over the next 18 months.
Stuart ran through the performance all of the divisions and later in response to a question he flagged up two divisions that he thought were most interesting and had most potential to surprise on the upside. People Solutions has a new management team and are delivering improved client services and efficiency gains for clients. The division is winning new business in the pensions administration area and has a substantial potential in the e-learning area where it has started winning contracts. The other division highlighted was Government Services which is emerging from some loss-making local government contracts. The relationship with central government is very strong and the pipeline of new business is also robust. There are positive tailwinds from government spending around infrastructure and getting people back to work post COVID-19 and the company is optimistic about future growth in revenues and profits.
A lot has already happened transforming the business in the last three years and the company is emerging, post COVID-19, in a much better shape but there is still plenty to do. Key in the short term will be any announcement on the sale of ESS and the shape of the balance sheet. Longer term key are upcoming announcements on contract wins. The full year results are expected to be published in March.
Many thanks to Stuart for such a comprehensive run through and for answering all the questions so clearly.
A recording of the webinar can be found on the Yellowstone Advisory YouTube channel or by clicking here.
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