Capita undone by public sector spending cuts

Capita's shares fell to their lowest level in more than a year yesterday after the outsourcer warned that second-half sales would be hit by the Government's cuts.

The stock fell by 4.4 per cent to 690p as investors, who had been hoping for an outsourcing boost as the Government looks for savings, digested the news. "At the half year, we indicated that pressures on public spending might potentially affect growth in the short term in a small number of our trading activities," Capita, a major supplier to London's Crossrail project, said. "This is now occurring and will subdue revenue growth in the second half of the year more than previously anticipated."

An "unusually high degree of revenue attrition," as customers fail to renew contracts or offset them with news deals, is also expected to bear down on growth for the year, as is the fact that so far, the second half has seen "fewer sales decisions".

Robin Speakman, an analyst at Shore Capital, said that while government outsourcing could provide a boost, it may take some time before the benefits are apparent.

"We agree with management that the scope for material growth from efficiency-driven, outsourcing contracts is high in the public sector, but we believe that is a process that is likely to take longer than has been indicated to date," he said. "We also believe that Capita's management team are likely to be disappointed by the slowness of this process."

The update follows the agreement of a memorandum of understanding on cost savings between Capita and the Cabinet Office last month, though the company said those savings were "not material" to its expectations.

Looking ahead, Capita remained positive despite the warning, saying: "The opportunities to work with central and local government to deliver greater cost efficiencies across public services through new outsourcing initiatives are strong."