Shares in outsourcer Mitie (MTO) have fallen 15 per cent since reaching their 12-month peak a month ago - and we reckon there's further to go. The group had a troubled year of trading in FY2015, finally closing its lossmaking mechanical and electrical engineering construction and asset management businesses. However, market pressures on its healthcare and property management businesses are squeezing the group's operating margin and the prospect of rising wage bills when the living wage is introduced next year threatens to add to these problems. What's more, we're wary of the growing significance of "other items" (amortisation and exceptional costs) in Mitie's income statements over recent years as the group attempts to deal with problem businesses and contracts (see table).
- Facilities management business had good 2015
- Offloading lossmaking businesses
- Exposure to public spending cuts
- Slow earnings growth
- Increasing net debt vs cash profits
- High level of "other items"
- Exposure to high living wage
Mitie's property management business provides services including repair, maintenance and investment consultation to a predominately public sector client base. The squeezed budgets of local authorities and housing associations have had a downward effect on margins. This division's operating margin was down 160 basis points last year, while its operating profit fell by more than a quarter to £10.4m, or 8 per cent of the group total.
Being on the payroll of local government has also hit the group's healthcare business. This segment provides homecare to people requiring support due to illness or disability through its MiHomecare business, as well as nurse-led complex care through the Complete Group. Once again, spending cuts forced down the operating margin, which more than halved to 5.4 per cent.
The facilities management operation is a far more significant contributor to profits than property management or healthcare and accounted for 88 per cent of last year's total. However, despite rising margins in FY2015, there are reasons to worry about the sustainability of Mitie's industry-leading levels of profitability given its focus on providing blue collar services, such as cleaning, as the introduction of a living wage can be expected to ratchet up costs.
Mitie also needs to be seen in the context of the large exceptional costs it has reported over recent years as the group attempts to sort out struggling operations and contracts. Indeed, even though net debt has moved down from a 2013 peak (see table) it represented twice last year's statutory cash profits compared with 1.6 times the year before. The company does remain "comfortably" within its banking covenants, though.
OTHER ITEMS VS HEADLINE PTP
| Year to 31 March | 2011 | 2012 | 2013 | 2014 | 2015 |
|---|---|---|---|---|---|
| Headline PTP* | £106m | £105m | £111m | £113m | £114m |
| Other items** | £18.9m | £10.0m | £52.3m | £44.9m | £72.6m |
| Other items as % of headline PTP | 18% | 10% | 47% | 40% | 64% |
| Net debt | £76.5m | £107m | £192m | £187m | £178m |
*Based on continuing operations in given financial year
**Other items represent statutory costs not included in headline PTP relating to acquisitions and restructuring
Source: Company
MITIE GROUP (MTO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 281p | MARKET VALUE: | £1.02bn | |
| TOUCH: | 280-281p | 12-MONTH HIGH: | 330p | LOW: 264p |
| FORWARD DIVIDEND YIELD: | 4.7% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 103p* | NET DEBT: | 47% | |
| Year to 31 March | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 1.98 | 109 | 22.5 | 10.3 |
| 2014 | 2.14 | 113 | 23.6 | 11.0 |
| 2015 | 2.27 | 114 | 24.2 | 11.7 |
| 2016** | 2.38 | 119 | 25.0 | 12.4 |
| 2017** | 2.50 | 125 | 26.4 | 13.3 |
| % change | +5 | +5 | +6 | +7 |
Normal market size: 7,500 Matched bargain trading Beta: 0.87 *Includes intangible assets of £541m, or 149p a share **Investec Securities forecasts, adjusted EPS and PTP figures | ||||
