SMALLER COMPANIES: Service group set to clean up

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The Independent Online
THE building industry may be in the doldrums, but that has not prevented maintenance services group Mitie from putting together a remarkable sequence of sales and profit increases. Success has come from targeting the refurbishment market and from a highly effective system (not based on share options) for motivating management. Profits have risen seven- fold since 1990, with no sign of any loss of momentum. Rather the contrary with chairman David Telling commenting that there are signs of firming in parts of the market for the first time since the group went public at the end of the 1980s.

The business was formed in 1987 by Mr Telling, who had previously built up the HAT Group into a business with a pounds 240m turnover before it was taken over by BET in 1986. A stock market quote was obtained in 1988, when the group reversed into the cash-rich quoted "shell" company, Highgate & Job. The following year, the name was changed to Mitie.

At this stage, the business was still tiny; sales and profits for the year to 31 March 1989 were pounds l0m and pounds 353,000 respectively, against a just reported pounds 125m and pounds 4.6m. But the ambitions were already colossal, with Mr Telling nursing what, to almost anyone else, must have seemed the wildly improbable dream of building a group with a turnover of pounds 300m and 10 per cent profit margins.

Cleaning is not necessarily up there with architecture as a career choice to brag about to mates at the pub. But Mr Telling and his long-time colleague, managing director Ian Stewart, have had great success in putting together a highly motivated team that delivers high levels of service to a loyal customer base.

The key is a combination of autonomy and the ability to make serious money. Mitie (which stands for Management Incentive Through Investment in Equity) sets up private companies with groups of individuals who put in effort, contacts and cash in return for some 40 per cent of the company. Mitie holds the rest, giving it control. When the business starts to perform, the management can swap their minority for shares in Mitie, typically on a formula of 10.5 times post-tax earnings.

Some two thirds of the group's issued capital is held by management and employees, of whom 10 are paper millionaires. It is a caricature to describe what Mitie does as cleaning. It provides a whole range of maintenance, painting and engineering services for what can become sizeable clients - IBM spends approaching pounds 3m on a range of services supplied by Mitie.

Other clients, such as BHS, have also built strong relationships within the group, typically based on confidence from years of dealing with the same individuals. This can have slightly bizarre effects as nationwide customers insist on dealing with the same people - so Mitie South East can find itself called to refurbish stores in Scotland.

Much of the outperformance has come from targeting the refurbishment market. Changes of ownership, such as Sainsbury's Homebase buying Texas Homecare or legislation freeing up the betting industry to brighten up betting shops, all stimulates refurbishment spending and creates opportunities for groups such as Mitie.

A further boost should also come from the acquisition of Securicor's cleaning business, which has some pounds 10m of turnover. Mitie is notoriously lean on overheads and expects to be able to cut costs sharply at the Securicor operation.

The shares, at 238p, have already risen a long way from the low of around 70p in 1990 and may look demandingly priced on an historical p/e ratio of 19.5 and a yield of 1.6 per cent. However, the general air of confidence at board level suggests that there is still plenty of growth ahead.

Based on the first three months' trading, turnover is said to be running at pounds 160m with a further small improvement in margins expected. Last year, they rose from 3.4 per cent to 3.7 per cent. If they make it to 4 per cent, that would imply profits of pounds 6.4m for 1995/96, which is ahead of forecasts of around pounds 6.2m and would drop the p/e to 15.5.

Earnings quality is good with a solid base of recurring income and margins would still be way short of Mr Telling's targets. The shares could reach pounds 5 over the next two years.