Investors and ministers are desperately hoping new CEO Jon Lewis can pull off a turnaround. The man who called Capita's problems two years ago says they're taking a lot on trust
Talk about a strange start to the week: Troubled outsourcer Capita started it as the stock market’s hot share.
A company that sparked real fears of it being the next outsorucing domino to fall after Carillon shot up like one of Elon Musk’s rockets as it unveiled details of a £700m cash call, and a £300m disposal programme, four days earlier than expected. Alongside the small matter of a half billion pound pre tax loss.
If that makes you go ‘hmm’, the explanation for it is that there are an awful lot of people who really, really, really want to believe that turnaround specialist Jon Lewis can fix the thing. There are just as many of them working in the City of London as in there are in Westminster, where the government needs another Carillion like a hole in the head.
- Capita shares jump as it unveils plans to raise £701m from investors
- Tory minister defends outsourcing firms as Capita shares crash further
- Capita don’t provide a few services, they nearly run entire councils
So the former went hunting for positives, and they found them. But is their faith in the recently installed Capita CEO justified?
Mr Lewis told analysts on the early morning results call that he was targeting free cash flow of £200m for the company by 2020.
That’s an important figure because cash is something Capita has struggled to generate. It’s what explains the alarming rise in the company’s debt before Mr Lewis was installed.
The trouble is he hasn’t give much detail as to how he’s going to get there.
I took some time this morning to speak to Michael Donnelly, the Panmure Gordon analyst who knows a thing or two about the company having correctly called its problems two years ago. He told me this is all but unprecedented.
To get to Mr Lewis’ number, he and his colleagues are going to have to make an awful lot of assumptions.
Those that want to will find a way to make everything add up. They might, for example, choose to bank on the planned disposal programme producing a better than expected result for the business.
It’s just that past history should tell them that they should be very careful before trusting this sort of outfit. Mr Donnelly warns that this is not a clean business, even with the measures that have been taken so far.
Working in Capita’s favour is that the government wants to be able to trust Mr Lewis even more than stockbrokers and his big investors do.
When your most important customer is praying for you to succeed because you’re basically too big to fail? It gives you a good bit of leeway.
What investors appear not to have factored into their considerations is that they’re likely to face a bumpy ride and the medium to long term pay off might well be in question even if Mr Lewis delivers them to his promised destination.
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Remember, the UK will be starting out on what will amount to a two year election campaign in 2020, when Mr Lewis’ £200m is scheduled to appear.
There will be a lot of pictures of Jeremy Corbyn in the media at that time, and he and his team are likely to take a far more jaundiced view of Capita than the incumbent administration.
So I’d be reluctant to drink any Capita kool aid.