Founded in 1987, Mitie Group (MTO) is the UK’s largest facilities management company looking after two and a half million assets for more than 3,000 customers.
The firm takes care of buildings from banks to retailers, schools, hospitals and critical government sites, as well as the people who work in them, helping make them safer, more efficient and greener.
That means as health and safety regulation grows, and more companies take up the challenge of reaching net zero emissions, Mitie’s order book is only going to increase.
TURBULENT PAST
It may seem hard to believe now but from the early 2000s to around 2016 outsourcers were considered exciting growth stocks and in truth they enjoyed stellar margins and earnings.
After the Brexit vote, however, many companies and government departments put their spending plans on hold, leading to a slump in bookings and revenue for the sector and triggering multiple profit warnings.
At the end of 2016, Mitie chief executive Ruby McGregor-Smith stepped down after a decade at the helm and her successor, ex-British Gas chief Phil Bentley, was left to pick up the pieces.
In early 2017, the firm issued its third profit warning and admitted to accounting failures, including an over-valuation of its healthcare division which was subsequently sold off for just £2 in order to clear the decks.
Mitie also faced criticism over its running of detention centres and other local government facilities, and a combination of negative news flow and investor mistrust saw its share price halve from 300p to 150p between mid-2017 and the end of 2019.
Worse was to follow though, with the shares cracking during the pandemic and tumbling to an all-time low of less than 30p in late 2020.
Ironically, Covid was good news for Mitie: in the six months to September 2020 the firm won or renewed £500 million of security and cleaning contracts, around a quarter of which were directly Covid-related.
In the year to March 2021, the firm increased its revenues by 19% to over £2.5 billion, strengthened its balance sheet and took over failing rival Interserve, completing a four-year transformation under Bentley’s leadership.
It also predicted trading for the year to March 2022 would be ‘materially ahead of prior expectations’, replacing profit warnings with upgrades.
Sure enough, by March 2022 revenue had surged to almost £4 billion thanks to new contract wins, growth at Interserve and around £450 million of flexible rapid-response Covid-related contracts.
Free cash inflow was £133 million against a £25 million outflow the prior year, and the firm announced a £50 million share buyback as part of a strategy to reward its long-suffering shareholders, a gesture it repeated in 2023.
GROWTH AT A REASONABLE PRICE
Having gone from hero to zero and back again, Mitie is a much more focused and margin-driven business than in the past and in the six months to September 2023 the firm met or significantly exceeded all of the financial targets it set out at the start of 2022.
In the third quarter to December 2023, the company reported an acceleration in momentum with revenues 14% above the previous year and 6% above the second quarter to a record £1.15 billion, reflecting continued growth in key accounts, upselling on projects, contract repricing and ‘infill’ M&A deals.
The total contract value of new wins and extensions in the third quarter alone was £900 million, three times the previous year’s figure, taking the nine-month total to £3.5 billion or 46% more than the prior-year period.
Despite a strong final quarter last year, the firm predicted good revenue momentum for the three months to March 2024, albeit in the mid-single digit range rather than double digits, still comfortably ahead of the wider facilities management sector.
In terms of valuation, Mitie shares trade on 10 times March 2024 earnings according to Stockopedia, although the current forecast of 10.2p per share implies growth of just 4.4%, which seems conservative.
The forecast for March 2025 is even less demanding with the consensus pitched at 10.5p per share or 2.7% higher than this year, suggesting there is scope for upgrades when the company releases its full-year trading update later this month.
With the bar set low, the firm growing rapidly and its shares trading on 10 times earnings, we wouldn’t be surprised if Mitie became an M&A target in the near future.
Alex Wright, long-serving manager of Fidelity Special Values (FSV), holds Mitie among his top 10 positions and has been a fan for the last couple of years.
Under Bentley the firm has undergone ‘a massive turnaround’, leaving it in a much better position says Wright, while the acquisition of Interserve, which was controversial at the time, is ‘quite possibly the best acquisition I’ve seen’ says the manager, given the lowly price Mitie paid and its improved competitive position today.
‘The business showed its resilience through Covid and has subsequently shown good organic growth with an improved balance sheet. At 10 times this year’s earnings the shares are attractively priced’ adds Wright.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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