Investors decide that Mitie’s numbers are so bad they have to be good

A thumping stated operating loss and a big cut in the full-year dividend both mean that Mitie’s first set of full-year results under new boss Phil Bentley are pretty ugly, but the conclusion to the accounting review, the launch of a new strategy and a drop in net debt are all giving the shares a lift.
12 June 2017

Russ Mould, investment director at AJ Bell, comments:

“Investors are clearly deciding that the Mitie numbers are so bad that they cannot get worse and that if they cannot get worse then they can only get better.

“The stated operating loss of £6 million includes £88 million of one-off items, as a result of the review of the company’s previous accounting policies, while the withdrawal from the healthcare market knocked a further £132 million off the net income number and the bottom line.

“However, a 3% increase in sales at the core facilities management business offers some grounds for hope, as does a drop in the net debt figure to £147 million from £178 million – less debt means less risk and less risk can mean a higher valuation for the shares.

“A £45 million cost-saving programme underpins Mr Bentley and the overhauled Board’s plans to revive the company’s financial fortunes and investors will take heart from sector peer G4S, which is about to re-enter the FTSE 100 after a major turnaround under Ashley Almanza.

“That said, the road to redemption could be a bumpy one. Mitie’s key end markets are not growing that quickly and underlying operating profit (excluding the one-off items) still fell 14% last year as overhead costs rose.

“The experiences of Serco, another sector peer, show that it could take time to forge a sustained improvement in profitability at what is a complex business based on multiple long-term contracts which need careful management and where any slip can lead to a marked drop in profits.”

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