* Shares down 40 pct after cutting dividend
* Announces rights issue for up to 700 million pounds
* Group cuts 2018 profit forecast by around 30 percent (Adds reaction)
LONDON, Jan 31 (Reuters) - British outsourcing group Capita lost 40 percent of its value on Wednesday after its new boss slashed profit forecasts and set out plans to raise cash to avoid the same fate as collapsed Carillion.
Just two weeks after its rival perished under a pile of debt, Capita said it needed a complete overhaul and to retrench after lowering its 2018 profit forecast by 30 percent only 7 weeks after it had reiterated it.
Under new Chief Executive Jonathan Lewis who arrived in December, Capita said it would raise around 700 million pounds ($992 million) in a rights issue in 2018, cut the dividend and sell assets to enable it to increase investment and plug a hole in its pensions scheme.
Capita's shares were down 45 percent by 0950 GMT, wiping 920 million pounds off its market value and taking the stock down 84 percent since a peak in mid-2015. At 191.3 pence, its shareprice was trading at levels last seen in 2003.
"Capita needs to change its approach," said Lewis, who took charge after several profit warnings last year.
"We cannot continue to focus on the incredibly broad array of disparate businesses. The strategic review we're undertaking will cause Capita to shrink, cause Capita to focus."
The news sent shockwaves through a sector still reverberating from Carillion's demise on January 15.
Britain's outsourcing industry has built up since the 1980s and is now dominated by a raft of giants such as G4S, Serco, Capita, Mitie and others who employ tens of thousands of people to provide services to the government and large corporations.
Many were hit after they took on work at wafer-thin margins during the financial downturn, leaving little room for error. A slowdown in decision-making after the Brexit vote has compounded the problem and led to a string of profit warnings.
Capita's plans were likely just the beginning of the restructuring, analysts said, but they welcomed the fact that the new boss was acting to avoid the fate of Carillion, which went into liquidation when its banks stopped lending.
"Similarities with Carillion are all too clear but action, however painful, is better than fudging numbers," said Neil Wilson, senior market analyst at ETX Capital.
Like Carillion, Capita provides vital services in Britain from supporting Transport for London, the National Health Service and a raft of private companies. It employs 73,000 people and operates primarily in Britain.
However Carillion, which also built large infrastructure projects, was largely brought down by problems on a number of its construction contracts and not the day-to-day provision of services.
Capita said on Wednesday it had a number of good contracts but it had spread itself too thinly and had seen a further deterioration in decision making from customers since December.
"An immediate priority is to strengthen the balance sheet through a combination of cost savings, non-core disposals and new equity," it said.
Capita said underlying pretax profit, before significant new contracts and restructuring costs, were expected to be between 270 million and 300 million pounds ($426 million), compared with analysts' average forecast of 406 million pounds, according to Reuters data.
It forecast net debt at the 2017 year-end in the region of 1.15 billion pounds. It said the dividend would be suspended until the company generated sustainable free cash flow.
The firm is also undertaking a triennial review of its pension scheme. Its current expectation is that the actuarial deficit after this review will be significantly below the last disclosed deficit of 381 million pounds as at June 30 2017.
"We will seek to reduce the remaining deficit as a priority," it said. ($1 = 0.7051 pounds) (Reporting by Kate Holton; Editing by Jane Merriman and Keith Weir)