Stockwatch: this sound value play can extend rally

When market indices get pressured with derisking from equities under way, it is interesting to see which shares are bucking the trend and why.

MITIE Group (LSE:MTO) in facilities management has recently shrugged off the volatility and yesterday rose nearly 7.5% to 131p after a financial update in respect of its 31 March year-end. This reaffirms a bull run since the wider market’s Covid low in autumn 2020, and shows how investment progress need not involve highly rated tech.

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Source: TradingView. Past performance is not a guide to future performance.

The group’s core services are security, cleaning/hygiene and engineering, well-diversified across 3,000 public and private sector operations. Despite continued moans about how Brexit has impacted the UK economy, Mitie is strong and successful in six European countries and operates across various others.

After a three-year plan from the March 2022 to 2024 financial years delivered 80% capital growth for the shares, a second such plan to March 2027 aims to “extend market leadership through accelerated growth”.

Margin improvement is a key aspect of relatively recent progress, the summary table showing sub-3% at the reported operating level until March 2023, which makes a big difference against group revenue ,now expected to grow over £5 billion.

Mitie Group - financial summary
year-end 31 Mar

Source: historic company REFS and company accounts.

While the latest update cites a slip from 4.7% to 4.5% in normalised operating terms, this is said to reflect investments in the three-year facilities transformation plan, plus a loss in telecom projects (now at break-even). Call me wary but such a business does have to engage a certain level of investment to stay modern and competitive, hence what extent of adjusting the financial effect is fair?

This normalised operating profit is said to be “upgraded” (without giving prior detail) to £230 million against £210 million achieved in 2024, where the table shows £160 million achieved, so mind a significant difference.

The market may, however, have responded positively, and also to 9% organic revenue growth of 13% to £5.1 billion, which is ahead of guidance and “reflecting good projects demand”.

Mitie said:“We are entering the March 2026 year with good sales momentum, including a new security contract win with the Department of Work and Pensions (my insert: £136 million revenue a year for seven to  10 years), a record pipeline of opportunities and a strategic focus on how AI and intelligent process automation can help deliver margins above 5% by March 2027.”  

At least on free cash flow, Mitie quantifies latest guidance for around £135 million as well ahead of a previous forecast for “at least £100 million”, albeit down on £158 million in March 2024. Average daily net debt has risen 65% to around £265 million versus September’s intangibles-heavy net assets of £419 million.

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I would prefer to see (any change in) the order book quantified rather than the description of “strong”, which it always will be, relative to the scale of pipeline, currently cited at £27 billion.

But it all looks a lot more reliable than guessing the effects of US tariffs on a UK exporter, unless Trump’s administration remarkably exempts the UK in a trade deal or he reverses his stance.

Mitie comes across as a moderate growth business in terms of revenue and margin, essential services generating cash which is applied for acquisitions, buybacks and dividends. A £125 million buyback programme is launched relative to a market capitalisation of £1.65 billion.

Is another of Mitie’s multi-year bull runs intact?

In a very long-term context, after its founding in 1987 and listing as soon as 1988 with an acquisitive agenda, Mitie soared from a 5p share status to 90p, then, and despite not being a tech share, that bubble’s bursting saw Mite down to 60p by mid-2002.

There then followed a volatile-upwards rally over 180p by early 2014, albeit a plunge to 55p by early 2019 due to acquisitive overstretch and accounting issues.

This share’s history has therefore involved multi-year runs, then setbacks. Current management would doubtless argue this is in the past. Indeed, and despite a Labour government, there does not appear to be much, if any, cutting of private sector engagement on public assets.

The balance sheet still reflects an acquisitive history: £637 million goodwill/intangibles relative to £419 million net assets. Mind, £122 million net current liabilities albeit chiefly due to deferred income than trade debtors outweighing creditors in a late-payment situation.

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Mitie consolidates its leases within “financial debt”, making gearing comparisons a bit tricky. Total financial liabilities of £343 million offset by £159 million period-end cash meant a net interim charge near £7 million relative to £101 million operating profit, hence the balance sheet is in no way strained.   

In June 2021, I suggested taking a starter position at 63p when the CEO proclaimed an inflection point and £19 million investment in fast-growing, said to be a high-margin businesses. There had also been modest concerted director buying - six of them for a total £27.5k worth at 62p.

Updating in November 2022 at 82p, I was relatively cautious given the government has made a circa £100 billion about-turn on fiscal policy towards tightening, asking what might be the consequences for public sector outsourcing. The dividend yield was also sub-3%, nothing special, and is currently only a modest 3.5% if you base on 4.5p expected in respect of the March 2026 year.

Perceptively, Mitie is between two stools of neither appealing for strong capital growth nor yield, but the fact its chart is relatively robust, especially this year, perhaps shows investors moderating their expectations on both fronts. They currently seek neither highly rated growth – Mitie’s forward price/earnings (PE) may be around 10x – nor yields over 6% that may be exposed to economic slowdown.

Last year, the market doubted prospects, derating Mitie in early November from around 118p to 110p following the UK Budget, and the share commenced 2025 to around 107p. Perhaps this latest re-rate to a level not seen since 2017 is helped by the update saying: “National Insurance: March 2026 gross cost impact lower than expected; higher recovery being achieved; balance to be mitigated via margin enhancement initiatives.”

In which case, and on current information, it seems reasonable to expect relatively reliable earnings growth – even if quite modest – and dividends, the market is warming towards generally.

A continued improvement in the PE (from around 7x three years ago) could therefore happen if – as looks likely – Mitie’s story has changed to consistent growth.

Material insider selling has been quite a swerve ball

This has been another reason – besides UK fiscal and last October’s employer NIS hike – I did not resume coverage.

Last October, Mitie’s CEO sold nearly £5.6 million worth of shares at 117p, followed by the company secretary selling over £200,000 worth at 116p last January, although three other directors have been modest buyers at 110p and 115p.

Last June-July, the CEO and company secretary had also exercised options and sold out all the shares arising at 120p and 115p respectively, cashing out £2.7 million and £1.1 million. As if key insiders were inclined to take what profit was available than to settle gains tax arising and let return on equity work wonders.

All this makes me late to the Mitie party, at least in terms of 2025, as the shares rise again to 133p this morning. Perhaps this also reflects expectations for defence-related contracts where Mitie is involved.

Trading in response to this update is made tricky given another Trump-inspired market downer might help generate better prices than chasing this rally. On a two to three-year investment view, however, the risk/reward profile looks favourable enough to conclude: “Buy”.    

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.