The Investment Column: Mitie delivers 30% profits rise for 10th year running

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The Independent Online
THE MITIE Group has done it again, delivering pre-tax profits growth of more than 30 per cent for the 10th consecutive year.

Its chairman, David Telling, says the current year is going well and he's confident - baring "unforeseen" events - that the performance during the last decade can be sustained. But some analysts are not pencilling in the sort of numbers that Mr Telling is hinting at, so does Mitie really have a winning formula?

Mitie - an acronym for Management Incentive Through Investment Equity - provides an eclectic bunch of clients, including the Scouts and BT, with building and support services. It is tendering to clean the Millennium Dome. Mitie differentiates itself by its incentivised structure; employees own around half its shares.

Earnings growth comes from small business start-ups and the opportunistic acquisition of failing businesses. There were two acquisitions last year, and the group is eyeing up another couple, which could boost sales by up to 10 per cent.

Last year the group saw its margins widen, mostly due to start-ups in the support services arm, which are often loss-making in their first year but break even in the second.

The group further enjoys competitive advantage based on its ability to be fully compliant with the terms of its clients contracts. Meanwhile, the proliferation of safety regulations means customers are turning to Mitie's companies as cowboys are nudged out of the business.

Brokerage Rowan Dartington anticipates pre-tax profits of pounds 18m and earnings of 7.9p this year. Pending upgrades, with interim results that's a profits rise of a just 24 per cent, and puts the group on a forward p/e of 24.

While Mitie appears well-placed to deliver 30 per cent growth next year, the shares, up 6p yesterday at 188p, are not cheap.

Investors may wish to exploit their current strength and take some profits.

Sketchley

IS NOW the time to buy Sketchley, the troubled corporate garments business which sold its well-known high street shops last year? The group's results, posted yesterday, showed the costs incurred since David Gawler became chief executive last July to shake up the business. He hasn't held back. Exceptionals totalled pounds 12.4m. Mr Gawler says he's confident that it's all one-offs, "but with Sketchley's history you have to be careful". But now the costs of exiting retail are out in the open, Sketchley's looking less risky.

The group has two relatively solid, but unrelated businesses - garments and digging holes in the ground for utilities. The only element of similarity is that both are contract-based. Although both grew strongly this year, Mr Gawler is exploring the possibility of focusing on just one.

The garments business has some strong relationships with Tesco and Argos, for which it provides uniforms and laundry services. The division also sources and manufactures garments. Admittedly, downsizing means there are fewer employees around to be clothed. But with all parts of the division growing sales and profits, it could be attractive to one of Sketchley's larger rivals.

Meanwhile, the utilities business is outperforming expectations and has won several new contracts. These businesses, coupled with Mr Gawler's ruthlessness - head office now has just five people, central costs have been halved - are three reasons why the shares should move higher. Analysts expect pre-tax profits of pounds 10.7m and earnings of 9.1p per share this year, rising to pounds 14m and 9.8p in 2001. This puts the shares, at 41.5p, on a forward p/e of just 5. Buy.

Golf

GIVEN THE quoted golfing sector contains only PGA European Tour Courses and Clubhaus, it's no wonder that talk of consolidation has been around for a while. The boards of the two are to meet this week after PGA rejected an initial approach by Clubhaus, led by the deal-hungry Charlie Parker, thought to be about 40p a share.

There is logic to a tie-up. Many of their courses are contiguous, so economies of scale could come from sharing catering facilities and exploiting greater buying power. The combined group would also have a fine portfolio of top drawer courses. That would enable Clubhaus to imitate US golfing holidays structured around a time-share format. Clubhaus' European portfolio is too small to make such a venture viable. Moreover, Clubhaus would seek to roll out its health-clubs - a way of attracting golfer's families to courses - in some of PGA's estate.

Clubhaus' problem is that PGA's leading shareholder is ClubCorp, the US golfing giant owned by the wealthy Dedman family. Just two other shareholders control a further 38 per cent of the equity. Mr Parker will have his task cut out convincing Robert Dedman jr, who sits on PGA's board, that he, and not an American, is the man to expand golf in Europe. Clubhaus itself could well be a target for ClubCorp.

Meanwhile, Clubhaus has said it will not rule out issuing more paper to complete a corporate acquisition.

Risks attend both shares, but of the two, PGA, up 6.5p at 38.5p, 4.5p above its net asset value, looks like the better punt at this time.

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