The share price of struggling outsourcing firm Mitie Group PLC (LON:MTO) has halved over the last two years, prompting RBC to change its view.
The Canadian bank has lopped 10p off the price target at 200p but has upgraded the stock to ‘outperform’ from ‘sector perform’.
READ: Mitie Group expects to see “modest” revenue growth in wake of Carillion collapse
In RBC Capital Markets view, there is still much to do at Mitie and few people have lost money in recent years by expecting outsourcing firms to drop the ball but “the group looks to be focused on the right things (clients, costs and cash)”.
With a market-leading position and a much lower level of reliance on the public sectors than its peers, RBC reckons the stock should now be on the radar of those who don’t mind a bit of speculative risk.
Mitie has been awarded a contract with West Hertfordshire Hospitals https://t.co/iRWs8cujTu pic.twitter.com/xjTxYwC7Hv
— Hertfordshire Herald (@HertsHerald) April 11, 2018
“The turnaround plan (Helix) is costing more (+46% for FY17/18) and this has not been matched by a commensurate increase in the run rate of savings. Portfolio simplification has not materialised as expected and we have already seen a change in FD [finance director],” RBS noted.
“However, average daily debt is declining (as is the use of invoice discounting) and operational improvements are beginning to emerge. It is also important to note we are only one year into a three-year strategic plan,” the bank added.
Helix project
Given the uncertainty in the sector, RBC has been cautious in its growth and margin assumptions, but based on its forecasts, the stock trades on a multiple of 10 times projected 2019 earnings, which is “potentially a realistic starting point for a re-rating” in RBC’s view.
If project Helix starts to bite and the group’s medium-term margin targets become more realistic, then there would be significant upside to RBC’s forecasts.
“Putting this into perspective, if we were to assume a 4.6% margin (at the bottom end of its current guidance range) in 2020E, this would add c30% to our EPS forecast and reduce the implied PE to just 7x,” RBC said.
Shares in Mitie were 5.8% at 172.6p following the broker upgrade.