Is FTSE 250 penny stock Mitie (LSE:MTO) a good long-term investment?

The Mitie share price is up 64% year-to-date. Will this FTSE 250 penny stock continue to soar or has it had its moment in the sun?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors in outsourcing company Mitie Group (LSE:MTO) have endured a rollercoaster few years. The Mitie share price is far below its all-time highs. Between 1993 and 2014, it climbed. But since then, this FTSE 250 penny stock has been highly volatile. Despite being up 64% year-to-date, the share price remains 59% below its 2014 high.

A penny stock with promise

Nevertheless, since October 2020, the share price has climbed 144%. And brokers have been upgrading their valuations.

Earlier this month, Mitie released good FY21 results, showing trading resilience and a strengthened balance sheet. Its adjusted pre-tax profit fell to £46m from £69.9m but came in better than analyst predictions.

The company acquired Interserve, a facilities management business, in November. Since then, the acquisition has been performing ahead of expectations. Interserve is a low-margin business, but it’s helped Mitie enhance its footprint.

Mitie outsources a variety of workers including cleaners, security guards, and maintenance teams. With the pandemic creating an unprecedented need for intense cleaning regimes, its staff have been in high demand. And as the reopening accelerates, I think this is likely to continue.

The company is improving its security offerings too with technological advancements and is also an industry-leading AC and renewable energy contractor. These are another two areas of growing interest.

So, the potential for further growth is strong. And the company believes its 2022 profit will be “materially ahead” of its prior expectations.

Notable shareholder

Furthermore, another compelling argument for enhanced interest in this stock is that deep value fund Silchester is its biggest shareholder. Silchester has a close to 15% stake in Mitie, and it recently upped its investment in Morrisons to 15%. Shortly afterward, Morrisons received a potential takeover bid. As such, I think UK investors will be paying closer attention to Silchester’s portfolio in the coming months.

Financial outlook

Mitie has a forward price-to-earnings ratio of 12.7. And a £201m rights issue last summer helped it drastically reduce its net debt, while also funding the Interserve acquisition. But it cancelled its dividend after the pandemic struck and is holding off on resuming it until 2022 at the earliest.

Also worth noting, Project County sold its last 7% stake in Mitie last week. It acquired these shares through the Interserve acquisition and sold them when the lock-up period ended. This means the stock no longer has the potential for dilution (aka overhang) from the Interserve purchase.

All of the above sounds great, but it’s still quite speculative. Mitie is a penny stock emerging from a seven-year struggle. It might continue to rise, but I imagine it wouldn’t take much economic disruption for its share price to tumble. Being a low-margin business makes me nervous too, plus a lack of a dividend to sweeten it makes me reluctant to buy shares in Mitie today.

Besides, there are other FTSE 250 stocks I’d prefer to invest in for long-term rewards. Nevertheless, I do see potential and I’ll keep it on my watch list for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of British bank notes
Investing Articles

Here’s how big a second income we could target from a Stocks and Shares ISA

Want to invest regularly to build up a second income to provide comfort in retirement? Let's see what we might…

Read more »

Front view of aircraft in flight.
Growth Shares

Why now is a crucial time for the easyJet share price

Jon Smith takes a closer look at the movements in the easyJet share price and explains what it reveals to…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

Since January, the sizzling NatWest share price has turned £10k into…

The NatWest share price has been red hot in recent years, and Harvey Jones assumes that it has to cool…

Read more »

Typical street lined with terraced houses and parked cars
Growth Shares

Red flag! This FTSE 100 stock looks really overvalued to me

Jon Smith explains why he believes a FTSE 100 stock's overvalued and where he can find better ways to get…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

2 cheap UK dividend shares to consider buying in an ISA today

When I look for dividend shares to hold for the long term, I seek out companies in essential business that…

Read more »

White female supervisor working at an oil rig
Investing Articles

Here’s what £10k invested in Shell shares one year ago is worth today…

Brokers were expecting good things from Shell shares a year ago, Harvey Jones says, so how have things panned out?…

Read more »

Girl buying groceries in the supermarket with her father.
Investing Articles

Q1 results give the Tesco share price a boost, but is it still cheap?

The Tesco share price is back in positive territory year to date after a brief dip, so what does the…

Read more »

Middle aged businesswoman using laptop while working from home
Investing Articles

£10,000 invested in Tesco shares 6 months ago is now worth…

Tesco shares have demonstrated robust growth in recent years. Dr James Fox asked whether the stock could still push higher…

Read more »