‘Things can only get better’ could be a good theme song for UK prime minister Theresa May at present, but it should also be blaring out of the stereo at the headquarters of under-pressure outsourcer Mitie Group PLC (LON:MTO) following its latest full-year results.
Investors certainly seem to have taken that message to heart, sending the FTSE 250–listed firm’s shares over 12%, or 30.4p higher at 277.2p, taking their gains in the last three months to over 40% following a boost from a surprisingly reassuring trading update at the start of May.
READ: Mitie shares jump as pipeline improvement offsets expected hefty full-year operating loss
Russ Mould, investment director at AJ Bell, said: “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.”
He pointed out: “The stated operating loss of £6mln includes £88mln 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 £132mln 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 £147mln from £178mln – less debt means less risk and less risk can mean a higher valuation for the shares.”
Phil Bentley, who took over as Mitie’s chief executive from Ruby McGregor-Smith last December after the firm issued three profit warnings in a year, has exited its loss-making home healthcare business, overhauled the group’s management and set in place a new strategy and cost reduction programme.
READ: Mitie Group sells social care business for £2 in wake of profit warning
AJ Bell’s Mould said: “A £45mln cost-saving programme underpins Mr Bentley and the overhauled Board’s plans to revive the company’s financial fortunes”.
He added: “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.”
Mould concluded: “The experiences of Serco PLC (LON:SRP), 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.”
Much work for Mitie to do
Analysts at UBS also think there remains much work for Mitie to do, with further restructuring and investment needed.
But in an initial post-results note to clients, keeping a ‘neutral’ stance on the shares, they said the fact that Mitie has successfully renegotiated debt covenants and sees 'modest' profit growth from full year 2018 is “a crucial step forward.”
And analysts at Liberum Capital upgraded their stance for Mitie to ‘hold’ from ‘sell after increasing their target price to 250p from 165p.
In their note to clients, they said: “We believe that management’s actions and the forbearance of the banks have significantly reduced the risks of a rights issue.”
The Liberum analysts added: “There is much to prove and the industry is likely to remain competitive and low growth. Differentiation through technology will also require investment.
“However, the scale of cost savings is impressive and we believe that the risk of a rights issue has receded significantly”.