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Is this Kier competitor stock a bargain?

Troubled Kier Group, announced in June that it’s to cut 1,200 jobs and sell its homebuilding business to reduce costs by £55m a year. I still wouldn’t touch it with a bargepole but Mitie Group (LSE:MTO), one of Kier’s top competitors in the Facilities Management Services industry, looks more appealing.

I also covered Rentokil Initial the other day, which bought a subsidiary of Mitie’s earlier this year. These factors inspired me to look at Mitie as a potential investment, and I’m pleasantly surprised.

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While Rentokil’s share price has been on an upward course over the last five years, Mitie’s has gone in the opposite direction. Could this low share price mean the time is right to buy in?

Transformation strategy

The constituents of the FTSE 350 are reviewed quarterly and Mitie exited the FTSE 250 in March 2018 after an accumulation of problems including profit warnings, the collapse of Carillion (which cast a bad light on outsourcers in the sector), a Financial Reporting Council investigation into ex-directors and many internal staff changes.

Clearly, things needed to change and Mitie, which provides planned outsourcing and infrastructure consultancy, among other services, is going through a three-year transformation strategy. The company’s vision centres on creating value for stakeholders and was a necessary response to its run of bad luck. The goal is long-term, sustainable growth, and the process has been split into stages. Phase 1 is complete and was deemed a success by the firm, with savings of £45m per annum. Phase II, known as Project Forte, has begun and is concentrating on driving simplicity and efficiency in engineering services.

Thankfully, things appear to be looking brighter for the company, now that it’s emerging stronger in a sector beset by doom and gloom.

Revenue and profit growth

Revenue and profits grew for the 2018/19 financial year with revenue up 9.4% to £2.2bn. Operating profit rose to £50.2m, compared with the previous £1.1m and basic earnings per share was 8.6p, from a loss of 7.6p in 2017/18. Net debt fell to £141m, from £194m the previous year. The dividend was 4p with a yield of 2.65% and the price-to-earnings-to-growth ratio (PEG) was 0.9.

Part of the group’s restructuring strategy is seeing it continuing to invest in customer service and technology along with exiting non-core businesses, namely pest control (recently sold to Rentokil) and social housing.

Organic revenue growth of 5.5%, operating profit growth of 6% to £88.2m and a stable order book of £4.1bn, all point to a brighter future.  

Government contracts on the horizon?

Now that Mitie is appearing to have a more positive outlook than its rivals, it could be in a better position to win government contracts that were previously out of reach. Another competitor in dire straits is Interserve, which holds government contracts that it won’t be allowed to re-bid for. This could put Mitie in prime position to pick up new business.

But there’s risk with Mitie too. The downward trend in the five-year share price means earlier investors could be nursing losses with no guarantee that new investors will see a rising share price. And its assets are worth less than its liabilities for now. However, I do believe things are on the up for the firm. The PEG ratio is less than 1, which can show an undervalued stock. So, is it a bargain? I think it is.

Capital Gains

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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.