Mitie shares surge on £2 sale

After just three months on the market, serial profits warner Mitie has managed to sell its loss-making healthcare businesses for a quid each, although it must also help fund its turnaround. After plunging to 2008 lows in November, this great news is helping Mitie's share price fill the so-called "manipulation gap" following last September's warning and accelerate its recovery.

Private equity healthcare investor Apposite Capital has taken Enara Group and Complete Care Holdings off Mitie's hands for a total of £2, with the former owner paying £9.45 million to cover trading losses and the cost of its turnaround plan. The first £5.4 million will be transferred on 1 April.

We knew Mitie was looking to sell the two businesses which make up the healthcare division, although it was expected to take longer. After a decade at the helm and having just issued Mitie's second profits warning in three months, Ruby McGregor-Smith used her final update as chief executive in November to hoist a 'for sale' sign above the failing division.

New boss Phil Bentley, former chief of Cable & Wireless Communications, has experience of repairing troubled companies, with stints at British Gas and Centrica under his belt. With Mitie struggling with rising labour costs, economic uncertainty and reduced client budgets, Bentley certainly has his work cut out.

Mitie has done well

Despite headline figures implying Apposite Capital is the winner here, Mitie has actually done rather well. The outsourcing firm recognised a £115 million impairment from its healthcare divisions in the September half-year results and further losses are expected to reach £36.8 million this financial year - include £12.5 million for the two businesses in 2017, the £9.45 million contribution and £14.8 million net asset write off. No wonder management wanted to offload the division.

Mitie has likely also avoided risking its bond covenants, with UBS pencilling in net debt/cash profit (ND/EBITDA) of 2.6 times for 2017, including healthcare losses and cash costs. It depends on Mitie's treatment of exceptional charges, but even in a worst case scenario that includes provisions for future losses within cash profit, ND/EBITDA of 3 times would still be within covenants.

Offering home care for those suffering from illness, infirmity or disability under the MiHomecare name, Enara made £11.5 million in losses before tax in the year to March 2016, with gross assets of £17.9 million. In the 10 months to January 2017, it lost £8.8 million on revenue of £42.3 million.

Complete Care provides complex nurse-led home care, but its losses had surged from £0.2 million in the year to March 2016 to £2.6 million in the 10 months to January 2017. Gross assets were worth £4.2 million in 2016.

"Given healthcare was tracking at an on-going operating loss of c£10 million p.a., and some contacts stretch over 3yrs, we believe this is a relatively good outcome, all things considered," explains UBS analyst Rory McKenzie. "New management is making good progress towards the turnaround, in our view."

Investors will have to wait until May for March 2017 results, but McKenzie expects a slip in revenue from £2.23 billion to £2.19 billion, but operating profit to more than halve to £63.8 million, with earnings per share down nearly 60% to 10.7p. He thinks management will cut the dividend by almost a third to 8.4p.

Testing two major resistance levels this morning, Mitie's share price initially jumped 10% to 228p. After peaking above its long-term bearish trendline, buying eased up and the share price slipped back to 221p.

A forward price/earnings (PE) multiple of 21 times doesn't scream value; neither does a 3.8% yield. However, if earnings pick up as UBS expects, patient investors may be rewarded - the outsourcer trades on a more reasonable 13 times 2018 earnings estimates. Still, UBS analysts are holding fire for now, maintaining their 'neutral' rating and 205p target price.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.