Undervalued Mitie reports strong revenue growth

Outsourcer Mitie’s (MTO) results need to be viewed through the lens of Covid-19. While annual revenues were only up slightly, this was a solid result given that pandemic-related contract sales fell from £448mn in FY2022 to £15mn. And while the company delivered a better-than-expected adjusted operating profit of £162mn against its previous guidance of £155mn, the contraction in operating margin by 20 basis points to 4 per cent was due to the loss of higher-margin pandemic work. 

Excluding Covid-19 contracts, however, underlying sales and operating profit rose by 14 per cent and 44 per cent respectively. The facilities manager picked up the revenue slack through new contract wins, contributions from recent acquisitions and a £163mn boost from price increases. Contract renewal rates are still over 90 per cent, although management warned that “it is challenging to maintain renewal rates at the current level”.

While the balance sheet pivoted to a net debt position, leverage remains low at 0.4 times average net debt against cash profits. The decision to terminate the company's invoice discounting facility increased receivables by £45mn, hitting free cash flow, which fell from £147mn to £66mn. 

Looking ahead, profits should be boosted by the ongoing target operating model programme, which drove £6mn of cost savings in the year and is expected to deliver £20mn of further savings in 2024. Margins should also benefit from a forecast £5mn of additional synergies from the Interserve acquisition, and the company's mid-term operating margin target of 4.5 per cent to 5.5 per cent looks achievable.

Analysts at investment bank Jefferies said that Mitie “continues to demonstrate better-than-expected revenue momentum, cost control and inflation pass-through and, in our view, is an undervalued asset in a sector with rekindled private equity interest post-Covid”.

The valuation is certainly modest, with the shares trading at 11 times forward earnings according to the consensus analyst position on FactSet, despite sitting above the five-year average of nine times. Buy. 

Last IC view: Buy, 93p, 18 May 2023