British outsourcer Mitie Group PLC (LON:MTO) expects full-year profits and revenue to rise as it nears completion of its turnaround plan but shares dropped as it warned its order book was set to weaken.
In a trading update for the year to the end of March, the company said it estimates operating profit before other items to be in the range of £84mln-£87mln, up from £83.2mln the previous year.
Profits will be boosted by higher revenue, costs savings from the company’s Project Helix restructuring plan and a positive contribution from Vision Security Group, the security services business Mitie took over from contractor Compass Group last year.
READ: Mitie's first-half profits decline as it carries out turnaround plan
Mitie anticipates a revenue increase of 7-8% and organic revenue growth of 4% for the year, led by a strong performance in its security and care and custody businesses.
Security services and care and custody lead revenue growth
The company said its security business has continued to perform well with good underlying revenue and profit growth as synergy benefits from the VSG acquisition start to flow through.
Revenue growth in the care and custody unit, which manages immigration removal centres for the Home Office and supplies custody support services for police forces, has continued in line with the strong performance seen in the first half.
Revenue jumped 82.6% to £52.4mln in the first half, supported by a detention and escorting services contract with the Home Office to provide immigration services.
Full-year profit in the care and custody arm is forecast to rise despite mobilisation costs related to the new contract.
The engineering services division – the largest within the group – is expected to post a higher operating profit and flat revenue as growth in larger contracts offset the impact of other contracts lost the previous year and the exiting of certain low margin accounts.
Professional services revenue is forecast to drop after pulling out of low margin international contracts while operating profit is predicted to rise after refocusing the business on higher margin activities and tight cost control.
Cleaning service operating profit is projected to fall due to an unfavourable contract mix while revenue growth slowed in the second half.
Catering revenue is expected to be broadly flat and operating margins will drop due to weaker sales in the outdoor events business.
Order book set to decline
Mitie said its order book is likely to fall by 10% over the year as clients steered away from entering longer-term contracts.
“Although our order book has softened, we have focussed on adding more value and services to our top clients and, as a result, we have seen continued growth in these accounts throughout FY 18/19,” said chief executive Phil Bentley.
Contract wins during the period included a £10mln three-year catering contract for Edinburgh College, a five-year document management and logistics services contract with The Law Society, a £14.5mln facilities management contract with Yorkshire Building Society and a £7.5mln five-year integrated facilities management contract with Connect Group.
The group was also awarded a £17mln five-year contract extension with Gatwick Airport.
Restructuring on track to be completed at year-end
Project Helix is on course to be completed at the end of the year, delivering about £50mln of overall run-rate cost savings by cutting management levels, offshoring IT and back office finance transaction processing and making improvements in engineering fleet.
Once completed, Mitie will turn its focus to the digitisation of its engineering business by replacing existing systems and automating some jobs.
The group said it expects to continue to operate “comfortably within our banking covenants” with net debt likely to fall to £160mln-180mln after the end of the year, compared to the £186.7mln reported in the first half.
"Mitie is well-positioned for future growth despite a challenging backdrop in the industry and political uncertainty," the group said.
"We expect to continue to grow revenue organically at 3-4%."
While the company has renewed contracts in the year at lower margins, it still expects to achieve its margin target of 4.5-5.5% over the medium term.
For the next financial year, it sees “moderate growth” in operating profit as higher revenue and cost savings mitigate lower margin contract renewals and investments in the business.
Shares fell 8% to 137.9p in morning trading.
Liberum maintained a 'buy' rating and target price of 210p,
"Mitie offers some of the highest growth in the sector and is one of the cheapest companies in a cheap sector," the broker said.