Mitie runs out of room for further efficiency gains

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The Independent Online

Mitie is all of a bustle. Its 30,000 employees clean hospitals, airports, bus shelters and phone booths, provide catering for the Ministry of Defence and security for the Tower of London, refurbish superstars' changing rooms and manage the facilities at many manufacturing and retail sites across the UK.

Mitie is all of a bustle. Its 30,000 employees clean hospitals, airports, bus shelters and phone booths, provide catering for the Ministry of Defence and security for the Tower of London, refurbish superstars' changing rooms and manage the facilities at many manufacturing and retail sites across the UK.

Since its foundation in 1987, it has grown into one of the country's most successful support services groups, comprising a constellation of small part-owned or wholly-owned subsidiaries with highly incentivised managements. It is still expanding into new areas, trying to build a UK-wide network of security guarding companies, for example, or selling landscape gardening services to local authorities. The public sector accounts for 40 per cent of its work, and 70 per cent of the turnover expected this financial year is already guaranteed thanks to its habit of signing lengthy contracts.

The company maintains the entrepreneurial spirit required to drive such diverse and local businesses. Profit margins continue to be wafer thin and under pressure.

Management is sitting on a £60.5m cash pile, and share buy-backs should support the stock price. But despite the 3 per cent share price fall to 158.5p yesterday, Mitie still commands a premium valuation at 15 times expected earnings for the new financial year.

At that valuation, a new investor probably needs reassurance that future earnings growth can come from contract wins and from internal efficiency improvements. In Mitie's case, the prospects for the former remain strong, but the latter do not. Hold.

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