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Brexit spending slowdown strikes UK contracts capita

London - Brexit is taking its toll on UK outsourcing companies as clients put spending on hold in the wake of the country’s vote to leave the European Union (EU).

Capita, which runs London’s automotive congestion charge, plunged on Thursday after it said earnings will miss estimates because of a slowdown in business since the vote.

The slide follows a similar warning earlier this month from rival Mitie Group, which provides office cleaners, baggage handlers and social workers.

Capita said weakness in its technology business, including a slump in workplace services recruitment, will reduce profit by £30m. Delays in implementing a new system for the congestion charge will cause £20m to £25m in one-time costs, it also said.

The warnings are some of the clearest signs yet of the effects of the June 23 EU referendum on corporate activity as investors prepare for a round of quarterly earnings reports.

Business activity shrank in the aftermath of the vote, even though the broader economy so far has been more resilient.

Capita shares fell as much as 31%, the steepest drop in more than 20 years, and were down 27% at 698 pence as of 11:10. The slide slashed the company’s market value by almost £2bn, to £4.4bn.

Other outsourcing providers fell too. Security specialist G4S was down 3% at 225 pence, while facilities management company Babcock International Group fell 4% to 1 044 pence. Mitie, which plunged 29% on September 19, was down 0.6% at 185 pence.

Capita now targets pre-tax profit of £535m to £555 for 2016, compared with a company-compiled consensus estimate of £614m. The company lowered its outlook for full-year organic sales growth to 1% from "around 4%" previously.

Spending delays linked to the referendum may have brought to the surface problems stemming from Capita’s strategy of growing through acquisition, Shore Capital analyst Robin Speakman said by phone.

The company this year bought software providers such as Trustmarque Solutions and Health Analytics.

Some of its difficulties "are longer-term chickens coming home to roost, which clearly the Brexit issues may have accelerated," Speakman said. "Is the strategy unravelling of acquisition-led growth?"

Congestion charge

Capita experienced delays in implementing new technology for the congestion charge, which it said won’t recur. The company helped set up the system, which bills motorists £11.50 for entering central London on weekdays, in 2003 and secured a new contract to run it in 2014.

"Our delivery wasn’t up to the standard we’d expected," chief executive officer Andrew Parker said on a conference call.

Capita also said it was in a contract dispute with Co-Operative Bank, for which it processes mortgages. It said there was a "risk of litigation" stemming from the wrangle.

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