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Carillion: is contagion likely?

Last week we published a piece that suggested coverage of the Carillion collapse was being unfairly conflated with the profit warning from Capita and that the two separate incidents were being conflated, wrongly, to prove something about the entire outsourcing sector.

We’re kicking off this week with a glance at a piece in the Financial Times that takes the opposite view. In this, the writer draws a parallel with another high-profile collapse, two days ago: that of Baring’s Bank. Anyone seeing this in isolation would soon have been disabused of their position as the expansion into Asia proved unsustainable and, exacerbated by the actions of rogue banker Nick Leeson, the bank famously collapsed amid mounting losses.

The parallel drawn by the FT piece is that in both instances, fair accounting practices brought the institutions’ poor performance into the light. Practices have changed, meaning underlying profits are stated differently compared to how they were only a few years ago, which has made Capita’s profitability tumble even if the trends guiding the business are consistent.

Whether this means Carillion is the portent of more to come, we’re not convinced. Capita’s profit warning wasn’t about going into loss, it was about earning only 30% of what it had hoped; this means it will still have more money, but less more, which is bad if you’re a shareholder. It’s not the same as being under threat as long as investors hold their nerve.

The problem for Capita and others may be that investors went in assuming their investments would grow at the rate of previous forecasts. If those turn out to have been overstated under the new rules, the question is whether the investors will start to look elsewhere.

Last week we published a piece that suggested coverage of the Carillion collapse was being unfairly conflated with the profit warning from Capita. We still hold that view but it’s more nuanced than we may have assumed at first.

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