Mitie grows margin against tough backdrop

Outsourcing is famously low-margin. Mitie (MTO), however, has managed to boost its adjusted operating margin by half a percentage point to 4 per cent, on the back of operational gearing, £21mn of cost savings and “careful management of inflation”. Combined with an 11 per cent increase in revenue, this caused its adjusted operating profits to shoot up by 24 per cent to £85mn in the six months to September 2023. It also allowed management to increase the dividend by 43 per cent to 1p per share. 

After a difficult few years, Mitie is now going from strength to strength. Contract repricing, growth in key accounts, M&A and upselling have all bolstered sales, meaning the loss of Covid contracts and some other large projects has not proved too painful (during the period, one £35mn-a-year government contract was not renewed and a £55mn-a-year contract for a private sector customer was also lost). 

Mitie’s renewal rate has stayed high at 88 per cent and its total order book now sits at £2.6bn, up from £1.8bn this time last year. This provides decent visibility for the rest of the year, and management said the group was on track to hit its recently upgraded operating profit guidance of £190mn. This implies year-on-year growth of 17 per cent. 

Maintaining good levels of profitability will now be key. In the six months to September, Mitie only failed to pass through £3mn of cost inflation to its customers, suggesting its contracts are holding up well to macro pressures. Meanwhile, it saved £12mn through its ‘target operating model’ programme, which is designed to improve its organisational structure. 

Management said there were also savings opportunities in areas such as contract productivity, where it is “increasingly using AI analysis… to drive efficiencies in how we deploy resources" as well as in technologies that are helping to reduce vehicle accidents and repair costs.

Outsourcers are always vulnerable to unexpected contract losses, and Mitie’s margin is still very slim. However, its free cash flow generation has improved considerably over the past few years – it reported an inflow of £48mn compared with an outflow of £5mn last year and is on track to make at least £100mn across the full 12 months. Its revenues also look well diversified and cost savings are yielding results.

The market is recognising the group's new-found strength: the shares are up 41 per cent this year. However, Mitie still only trades on a forward price/earnings ratio of 10.3, putting it in line with the likes of Serco (SRP). Buy

Last IC view: Buy, 95p, 8 Jun 2023