It seems that caution was well placed, and though there was a small price recovery shortly afterwards, it soon reversed itself and the shares are now down 8.2% since my words. And that’s almost entirely composed of Wednesday morning’s fall after the release of a first-half pre-close update.
The firm said it expects full-year operating profit to be “flat to slightly down” on last year. And though that is in line with prior expectations and was put down to “ongoing investment to drive faster top-line growth,” it was enough to drive investors into a sell-off. Revenue is expected to come in 2%-3% ahead.
Chief executive Phil Bentley told us that “the majority of our businesses are performing well and our larger contracts are delivering solid growth in volumes and profitability,” though his comment about the industry remaining “highly competitive, especially when it comes to contract renewals” surely reminds us of the need to be careful.
My biggest concern was debt, and average daily net debt is now expected to be around £40m higher than last year at £278m, with a 30 September figure of £230m to £250m. The company says it should still be working within its banking covenants, and if Mitie does get back to earnings growth then debt should become less of a problem. And currently reduced dividend yields of 2.6% could be set to resume their climb.
I’m still cautious. H1 results are due on 22 November.
I can’t help feeling that the dividends on offer from Galliford Try (LSE: GFRD) have been overlooked by investors, quite possibly because attention had been turned towards fears of a slowdown in the construction business.
That’s led to a share price fall of 35% since August 2015’s high point, which in turn has pushed the forecast dividend yield up to 6.8%. With EPS for the full year set to drop a bit, however, the question must be whether the company can afford that level of payment, which would be a few pence down on last year.
Results for the year ended June suggest that should not be a problem, with pre-exceptional EPS up 21%. The dividend was reduced by 10%, covered twice by earnings in line with the company’s current policy. The 6.8% dividend forecast for the next full year allows for a 13% EPS fall in the current year coupled with the same cover.
So why buy shares with a declining earnings and dividend forecast? Well, the period after a bull run when the share price of a solid company is depressed looks like a fine time to me to be buying shares.
There are clearly worries over a post-Brexit downturn in the construction business, but I see significantly too much fear currently built in to the share price. We’re looking at a forward P/E here of only 7.5, and that’s for a company with fairly modest average net debt of £227m (compared to pre-exceptional pre-tax profit of £188.7m).
Even if the dividend were to yield only around 5%, I still think I’d be looking at an oversold long-term bargain — though I could still see some short-term volatility.
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Alan Oscroft 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.