Mitie announces dividend and buyback

After a bumpy lockdown, Mitie (MTO) shareholders will be pleased to hear about a £50mn share buyback programme and the reinstatement of the final dividend.

The facilities management group has reported a surge in sales and profits for the year ended 31 March. This is partly a result of the pandemic: short-term Covid-related contracts generated £448mn of revenue in FY 2022, up from £155mn in the prior year. These contracts are particularly profitable, driving Mitie’s operating profit margin up from 2.3 per cent to 4.2 per cent.

The group’s success is not solely down to the pandemic, however. Underlying revenue  growth – excluding contributions from Covid contracts and Interserve, a major acquisition made in 2020 – was strong at 14 per cent. Even without the help of Covid contracts, its adjusted operating profit margin also rose from 2 per cent to 3 per cent, edging it closer to management’s target of between 4.5-5.5 per cent.

As these figures suggest, management has made good progress cutting costs. After buying Interserve Facilities Management for a hefty £271mn, it achieved cost savings of £30mn in 2022 – ahead of its £25mn target. Mitie is now on course to deliver £45mn of cost synergies by the end of financial year 2023.

Looking ahead, Mitie’s order book is also strong at £9.5bn, compared with £9.3bn this time last year. This has been driven by new wins across its central government & defence and technical services divisions, and renewals in business services. Other outsourcing companies such as Serco (SRP) are seeing similarly strong demand. 

The big threat now is inflation. Mitie has reassured shareholders that between 80 and 90 per cent of its contracts contain change of law and/or inflation clauses, which enable it to pass on “the majority” of inflation cost increases through to customers. It said it is still confident that inflationary impact to the business will fall between £10mn and £20mn next year, which it can mitigate with its programme of cost savings.

However, given Mitie’s very slim margins, rising wages remain a major concern, particularly given that the group has 29 per cent more employees than this time one year ago. For now, hold. 

Last IC View: Hold, 70.6p, 18 Nov 2021