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Outsourcing group Mitie climbs despite warning of healthcare funding crisis

Discussion in 'Market News' started by Lily, May 23, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Company sees lower revenues, partly due to government spending cuts

    Government spending cuts, rising labour costs and the uncertainty surrounding he EU referendum have combined to hit revenue growth at outsourcing group Mitie.

    The company, whose services range from a healthcare business providing care at home to facilities management for clients such as Sky and Rolls-Royce, said full year revenues slipped 1.8% to £2.23bn. Profits jumped from £41.5m to £96.8m, although last year saw a £45.7m charge relating to energy contracts.

    Our local authority clients have been faced with a multi-year squeeze driven by reduced funding from central government, increasing demand for services caused by demographic shifts and an inability to increase council tax.

    This has been alleviated to some extent by the UK Government’s decision to allow an increase in council tax of up to 2% to fund increasing social care costs. However, most of this increase will be absorbed by wage increases resulting from the new National Living Wage.

    We continue to see a range of good outsourcing opportunities across our key markets and anticipate modest growth in the coming year. We remain positive about the group’s prospects for the future.

    In spite of an optically cheap valuation (26% discount to the FTSE 250), we remain wary of investing in Mitie given the challenges at Healthcare and subdued organic revenue growth elsewhere.

    The full year results are ahead of expectations, no exceptionals but weak cash conversion. Estimates unchanged, but expect some of the higher numbers that did not change after the pre-close will fall.

    In line with expectations reset in March. A slightly better cash performance than we anticipated is a positive. The initiation of a capital return programme is encouraging, albeit the total in year one is modest. The group is low growth and needs to work hard to drive efficiency, including greater use of technology, not least to offset the headwinds of regulatory (apprenticeship levy, pensions and secondary effects from the National Living Wage). If it can deliver in line with our modelling including cash conversion improving, there is value. Our hold recommendation reflects our reservations.

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