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Woodford Served Blow by Capita

Capita shares have tanked more than 40% today as the company announced a profits warning and scrapped the dividend - impacting shareholders including Neil Woodford

David Brenchley 31 January, 2018 | 9:39AM

Capita runs the congestion charging zone in London

Top fund managers Neil Woodford and Mark Barnett were dealt a fresh blow on Wednesday after outsourcer Capita (CPI) announced a profits warning and rights issue and suspended its dividend.

The news comes just weeks after the collapse of Carillion (CLLN), with Capita saying pre-tax profits for 2018 will be between £270 million and £300 million rather than the £400 million previously expected.

It also confirmed investors’ fears and suspended its dividend, before announcing it plans to raise £700 million of new capital in 2018. Shares fell more than 40% to 195p in mid-morning trading in response.

It’s a fresh blow to under-fire fund manager Neil Woodford, who has stood by the troubled company through its swathe of profit warnings in past two years. In fact, Woodford recently revealed he had bought more shares last month.

New Capita chief executive Jonathan Lewis, who joined at the start of December, repeated his claim that “there’s a lot to be excited about” within the company. However, he admitted “significant change is required” after years of underinvestment.

“Capita needs to change its approach,” he said. Plans to strengthen the balance sheet will be implemented, with cost efficiencies and the sale of “a small number of businesses” planned.

“But cost savings and non-core disposals alone will not be enough. We have also taken the significant decision to suspend the dividend and seek equity,” Lewis added.

Woodford Woes

Capita shares have fallen 85% since a peak of over £13 in mid-2015. Woodford has been a key backer of Capita and we will be interested to see whether he plans to pump more cash into the business at the rights issue.

In his most recent fund update, the manager said he had increased his £715 million Woodford Income Focus Fund’s position in Capita after what he saw as a “very harsh” 12% decline after interims in December at around 410p.

While he admitted 12 days ago that a dividend cut was possible, “having met Jonathan Lewis… we are reassured that decisions around capital structure and the dividend will be informed by a clearer long-term strategy”.

“We… see the potential for significant value creation in the future as Capita is restored to the high-quality, successful and well-run business that it used to be,” he continued.

Which Other Funds Are Affected?

Veritas Asset Management is listed as the largest shareholder in Capita, according to Morningstar data, with a 13% holding. Woodford Investment Management and Invesco both own just shy of 10%.

Woodford is a long-term holder of the firm, meaning his old funds at Invesco are also exposed. Mark Barnett’s Morningstar Bronze Rated IP High Income and IP UK Strategic Income funds own 30 million and two million Capita shares respectively.

Another Woodford-run fund, the St James’s Place UK High Income Fund, owns almost seven million shares; as does the Morningstar Gold Rated Veritas Global Equity Income Fund, run by Charles Richardson and Andrew Headley.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Capita PLC146.00 GBX2.96
Carillion PLC14.20 GBX-28.95
Invesco High Income UK Z Acc307.92 GBP0.41
Invesco UK Strategic Inc UK Z Acc309.98 GBP0.35
LF Woodford Equity Income C Sterling Acc86.49 GBP0.56
St James's Place UK High Income Acc870.05 GBP0.76
Veritas Global Equity Income A GBP203.76 GBP-0.06

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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