Join our community of smart investors

Mitie battles to turn it around

The group is implementing its turnaround plan, but balance sheet strength and the integrity of the order book remain central to considerations
June 8, 2018

Though you could say that Mitie (MTO), as an outsourcer, is simply guilty by association, it's been beset by issues unconnected with day-to-day trading, including concurrent investigations from both the Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA). The FRC has concluded its inquiry “with no further action required”, although it’s still talking to Mitie’s former auditor, Deloitte, while the FCA continues to assess the timeliness of a profit warning.

IC TIP: Sell at 205p

Shareholders have also had to contend with a slashed dividend at the half-year mark and the recent failure of the group to sell off its property business. But after the high-profile failure of Carillion, a recent capital issue by Capita (CPI) and debt refinancing by Interserve (IRV) all eyes are on the balance sheet. Although Mitie has thus far avoided recourse to the market, exiting its March year-end with £59.8m in cash on hand, a repayment of placement notes and hedge settlements resulted in a £69.7m decrease in cash available through the period. With net debt “comfortably within covenants” but up by a third, the group is sailing close to the wind, and the balance sheet – in common with that of sector peers – is exposed to potential write-downs through the preponderance of intangible assets and trade/receivables.

Mitie is one year into a major three-year transformation programme, including group-wide rationalisation, outsourcing back-office processes and restructuring of the human resources function, understandable given 50,000 or so employees on the payroll. So far, the cost-cutting programme – “Project Helix” – has delivered £13.2m in annualised savings, expected to rise to £50m by March 2020. The group is also focusing on improved engagement with its customer base, which by its own admission has previously been conducted “in a somewhat fragmented way”. We hope this amounts to more than window dressing, as the contractual issues that have dogged the sector are bound-up with the tendering process – hence the proliferation of unviable legacy contracts – improved engagement could result in more realistic pricing.

Analysts at Peel Hunt are forecasting adjusted pre-tax profits of £73m in 2019, giving EPS of 16.1p (from £73.2m and 16.8p in 2017).

MITIE (MTO)    
ORD PRICE:205pMARKET VALUE:£749m
TOUCH:204-205p12-MONTH HIGH:314pLOW: 147p
DIVIDEND YIELD:2.0%PE RATIO:NA
NET ASSET VALUE:*NET DEBT:£193.5m
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20142.2168.413.411.0
20152.2741.59.711.7
20162.1591.920.112.1
20172.12-58.2-14.74.0
20182.20-24.7-7.64.0
% change+3---
Ex-div:21 Jun   
Payment:06 Aug   
*Negative shareholder funds and includes intangible assets of £348m, or 95p a share