BUZZ-UK outsourcers tumble again after Capita warning

** Shares (Berlin: DI6.BE - news) of British outsourcing companies in the red after Capita Plc (LSE: CPI.L - news) 's Wednesday profit warning, following on from collapse of Carillion (Frankfurt: 924047 - news) , triggers caution on the whole sector

** Capita falls 13 pct, Mitie 8 pct, Interserve (Frankfurt: 860509 - news) 16 pct, Serco 3.5 pct

** Capita pointed on Wednesday to a lower number of new contracts being awarded for smaller amounts and a sluggish business operating environment

** Barclays (LSE: BARC.L - news) says on Capita: "What takes us by surprise is the significant deterioration in near term profitability and continued drag on cash flow from one-offs and working capital as deferred income unwinds as sales momentum stalls"

** Barclays adds: "Government scrutiny of public sector outsourcing is only going to increase, we believe, and that’s before the possibility of a Labour government (which we think would have negative implications for UK outsourcers)"

** Neil Wilson, Senior Market Analyst at ETX Capital, sees "a potential flaw in the UK for the way these companies (outsourcers) have been awarded contracts and the way they have spread out and become more complex, operating on thin margins"

** Wilson (Oslo: WILS.OL - news) says: "It seems like there are deeper problems in the sector that could be beyond the problems of individual companies"

** Some investors believe Capita is no Carillion, a construction firm that operated on thin contract margins (Capita (Taiwan OTC: T1614Y.TWO - news) has valuable software and technology that brings good returns on some operations and represent barriers to entry for rivals)

** But UBS (Capita rating "neutral") says the company will be dealing with its issues for two more years before a potential return to growth and positive cashflow

** UBS (LSE: 0QNR.L - news) : "We prefer Serco in UK outsourcing, which we believe is ... ready to return to growth... We rate Serco Buy, with >60% upside to our 140p Price Target vs. the share price today

** Serco saw downgrades by three other brokers in January

** Laith Khalaf, Senior Analyst at Hargreaves Lansdown (Frankfurt: DMB.F - news) , says the problems at Capita and Carillion are "more a feature of the business model than they are some kind of market downturn"

** Says thin margins, poor earnings quality and high project delivery risks give these companies little room for error