UK shares are on the rise as the FTSE 100 nears 8,000 points. Closing at 7,930 points on Friday, it’s now just 117 points from last year’s all-time intraday high of 8,047.
Retail sales in both January and February were higher than analysts’ expectations, helping to boost the economy and subdue recession fears. This follows a revised ‘stable’ rating for the UK from credit agency Fitch. With the outlook improving, stock prices are likely to keep rising, so now could be a good time to consider grabbing some cheap shares.
I’m thinking about this promising mid-cap one.
Mitie Group
Mitie Group (LSE:MTO) is a FTSE 250 stock that’s flown under my radar for too long. Up 37% in the past five years, it’s been a strong and stable performer during a period when many share prices fell. It’s already recovered all its Covid-related losses and is now on a trajectory towards it maybe regaining the highs it enjoyed in 2014.
While Mitie Group might not be a household name in the UK, it’s a company that’s involved in many of our day-to-day activities. Headquartered in London’s famous Shard skyscraper, it provides facilities management and energy infrastructure services to organisations across the country.
Why do I think it’s a good investment?
Mitie is heavily invested in decarbonisation efforts, with a focus on helping organisations achieve their net-zero goals through sustainable energy initiatives. I’d hazard a guess that this is the main factor driving the company’s recent growth.
Analysts anticipate the global decarbonisation market to grow at a compound annual growth rate (CAGR) of around 14% for the next 10 years. The company is well-positioned to secure a decent chunk of this profit, and appears highly motivated to do so.
Financials and Balance Sheet
With £147m in debt offset by £411m in equity and £180m in cash, Mitie’s balance sheet is solid. Using a discounted cash flow model, analysts estimate the shares to be undervalued by 56% and forecast an increase of around 23% in the coming 12 months.
This evaluation is reinforced by a trailing price-to-earnings (P/E) ratio of 15, below the 17.7 average of its peers. Although notably, it’s slightly higher than one of Mitie’s main competitors, Serco Group, with a P/E ratio of 10. However, Serco’s earnings are forecast to decline 5.5% a year going forward, while Mitie’s are forecast to grow 12.6%.
Risks
Mitie operates in a very competitive industry and faces challenges from new entrants that could squeeze the firm’s margins. Although the economy is enjoying a mild recovery, rising wages could strangle the profits of labour-intensive businesses like Mitie Group.
Recent performance certainly gives the impression that the group is doing well but this is no guarantee of future growth. It will need to ensure it can outshine competitors. And it must continue to secure the lucrative contracts that helped it get this far.
With a debt-to-equity (D/E) ratio of 0.7, its debt situation isn’t a risk currently. However, if economic tightening limits spending on decarbonisation efforts, Mitie Group could be burdened with extra debt.
Overall, I think it would make a great complement to my already profitable Serco shares. While I don’t have capital to buy the shares right now, they’re firmly on my watchlist.
