I enjoy a contrarian buy and I believe Mitie (LSE:MTO) is just that right now. The UK’s leading facilities management and professional services company is a major player in the industry. It employs approximately 50,000 people who look after over 2.5m assets.
Mitie is one of Britain’s largest government contractors. Its customer base also includes large, diverse blue-chip organisations, from banks and retailers to hospitals and schools.
Why has Mitie’s share price dipped?
In an ambitious move, Mitie bought out Interserve’s facilities management division for £271m. In conjunction with this move was a rights issue in which Mitie diluted its stock. Worth £201m, the 805m new shares will help in reducing debt levels at the group.
When the market crashed, Mitie lost over 50% of its share price value. Rewind back to the beginning of the year and its per share price was close to 80p before plummeting close to 35p. The share price began to recover, reaching close to 50p before the rights issue was announced. Currently it stands at less than 40p, which I feel is a brilliant price for a company I see as having lots of value.
Value to be had
Mitie’s deal with Interserve opens up a new series of services. These include building maintenance, fire safety, waste management, cleaning, catering and security.
Most importantly perhaps, Mitie’s footprint in the public sector will increase, which is a big step towards long-term success and growth, in my opinion. In addition to the increased exposure to the public sector, it will pick up many other private sector customers it once competed for against Interserve.
FY19/20 results were released by Mitie at the end of June. Revenue rose by 4% and operating profit was up 8%. Another essential takeaway for me was that net debt had reduced by £75m. This shows me a business with a plan.
The Covid-19 pandemic has opened up new opportunities for companies such as Mitie. There is an increased necessity for hygiene to be at the forefront of how people work. The majority of large companies will use the easiest solution, which is outsourcing to external companies. Typically in the past, larger-scale customers commit to multiple-year contracts, which in some cases can be worth millions of pounds.
My verdict
I have long considered Mitie to be a great company from an investment perspective. With the addition of Interserve, the sky could be the limit in respect of growth and long-term success. Revenue generated between the combined companies will exceed £3.5bn. With earnings per share close to 8p, this gives Mitie a price-to-earnings ratio of close to 5.
I do not believe that the pandemic will leave Mitie completely unaffected. But what I would say is that as market conditions change along with the world around us, facilities management companies will be in demand. I think Mitie would be good for a long-term investor’s portfolio. The price is cheap as chips right now, and I am not worried by short-term volatility. In the long term, I wouldn’t be surprised if it climbed to a higher level once more.
