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This penny stock doubled in a year. Here’s why it can rise even more

Facilities management company Mitie Group (LSE: MTO) has seen a more-than-doubling of its share price over the past year, to 72p at Monday’s close. I do think however, that this may not remain a penny stock for much longer, however. 

Mitie Group upgrades profit guidance

The first reason why I think so is its numbers. In its recent trading update, it upgraded its operating profit guidance range to £145m-£155m for its current financial year, which ends on 31 March 2022. This is more than double the £63.4m seen the year before. 

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Last year was atypical because of Covid-19, so it is not entirely comparable to any other year. However, the projected number is substantially higher than even the year before the pandemic, when it stood at £86.1m. This latest forecast reinforces the positive outlook the company put out when it released its annual results in June as well. In particular, its contract renewal rate was at an all-time high, which gave a lot of hope.

Mitie Group divides its revenues into three streams. These are cleaning, security and office services (like document management and front-of-house). Last year, when there was little work done in offices compared to a usual year, it resulted in a dent in the company’s financials. However, some of the segments like cleaning and security picked up soon enough and that has continued into the current financial year. 

Credit facility on better terms

The company has also reported receiving a new revolving credit facility. It can make use of an amount adding up to £150m for four years. It replaces the previous RCF that was in place when the pandemic began. The new one is also on better terms than the earlier one, the company said. And it lowered its debt level last year too. So, it is no surprise that it has secured the facility. But it is good to know of its availability considering that we are not entirely out of the pandemic yet. Today, I see Mitie as a largely healthy company with strong prospects. 

Reduced activity as pandemic recedes

The one downer in Mitie’s update was regarding the next year. The company said that it was upgrading the current financial year’s profit outlook based on its performance in the first half. H1 got a fillip from its Covid-19 contracts. But they are expected to slow down in the second half of the year as the pandemic recedes. The outcomes for the business during this time are dependent on the ongoing economic recovery. If it turns out to be weaker than expected, there is a likelihood that the company’s numbers could disappoint in the following year.

Would I buy the penny stock? 

However, we do not know if that will happen. So far there are more signs of recovery than not. The latest monthly numbers do show a pause in the UK economy’s growth, but that could be temporary. For now, I think Mitie Group stock has a fair bit of potential and its share price could rise further. The penny stock remains a buy for my portfolio. 

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Manika Premsingh 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.

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