Time to back Mitie as rebuild continues?

With the short-sellers seemingly in retreat, shares in facilities manager Mitie (MTO) have taken another step forward today after well-received annual results highlighted progress in the company’s rebuilding job.

Chief executive Phil Bentley, the former British Gas boss, said that after one year of the company’s transformation programme Mitie was “where we need to be”.

This upbeat mood is in marked contrast to the state of uncertainty facing shares in Mitie and the rest of the outsourcing sector following the collapse of Carillion at the start of this year.

With shares close to 150p, Mitie was looking vulnerable after a spate of profit warnings in preceding months had made it one of London’s most shorted stocks with around 15% of equity out on loan at one point.

That’s now down to under 4% after the first year of a turnaround programme in which Mitie has focused on removing complexity and duplication, while making significant investments in technology, smart analytics and data-led insight.

Source: interactive investor        Past performance is not a guide to future performance

Today’s results showed there’s still plenty of work to do, with operating profits down 6% to £77.1 million, but in line with revised guidance. Net debt rose to £193 million, but analysts said this was better than expected as year-end leverage came in below 2 times net debt/earnings and well within covenants.

Crucially for shareholders, the total dividend for the year has been maintained at 4p a share, with the company likely to keep the pay-out at this level until the transformation programme has been completed.

Mitie, whose £4.5 billion order book spans pest control to custody support services, expects to report modest top-line growth in the current financial year, while it remains committed to achieving a medium-term margin of 4.5%-5.5%.

Andrew Gibb, an analyst at RBC Capital, said: “The group is clearly making progress, but with much of the heavy lifting now complete, there is a platform in place from which to grow.”

He believes there’s now an opportunity for scale players such as Mitie to take market share. Gibb added: “We also like the fact that the group is much less reliant on the UK public sector than its peers, an area of the market where we see continued risk in the short term.”

Canaccord Genuity has a price target of 300p, while Liberum maintained its 240p projection, having increased its 2019 and 2020 earnings per share forecasts to reflect the impact of the new IFRS 15 accounting standard and lower than expected costs from the National Living Wage.

Liberum’s price target is based on Mitie trading on a 2018 price earnings multiple of 11.3x, compared with a sector average of 15.5x.

Mitie’s recovery has mirrored the performance of MoD support services firm Babcock International (BAB), whose fortunes have improved in recent months.

Derek Mapp, Mitie’s chairman, said the collapse of Carillion and the failure of many other contracts to be delivered on budget, on time or at the quality required, showed that “wholesale recalibration” is needed for the economics of facilities management to continue to be sustainable.

He said this was now happening, with the focus of government, prospective customers and existing clients now moving away from just cost towards value.

Mapp said the early benefits from economies of scale and expertise had been eroded away, with third, fourth and even fifth generation contracts now resulting in low margins for providers and few cost give-aways for customers.

“However, technology and scale remain opportunities for the sector and what has become clear is that these need to be delivered in tandem with a wholesale industry-wide correction in the pricing of risk. Contracts need to correctly account for price, quality, certainty and timeliness of delivery,” he added.

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