Shares in FTSE 250 outsourcing specialist Mitie Group (LSE: MTO) are up by 8%, as I write, after the company said results this year should be better than expected. The Mitie share price has now risen by 80% over the last year — but I think there could be further to go.
Mitie has had some problems in recent years, but the latest numbers from the company suggest to me that CEO Phil Bentley may have pulled off a genuine turnaround. Should I consider buying the shares for my portfolio?
Better than expected
Mitie’s cleaners, security guards and maintenance teams remained in demand last year. Customer sites such as hospitals, supermarkets and factories mostly stayed open, supporting steady trading.
The firm’s numbers show the benefit of Mitie’s exposure to these essential sectors. Underlying revenue fell by just 1.6% to £2,139m last year. However, the mix of work carried out by the company changed.
Mitie carried out more cleaning and security work last year, but fewer technical projects. As a result, the group’s adjusted pre-tax profit fell by 34% to £46m. Even so, today’s results are well ahead of broker forecasts I’ve seen for a pre-tax profit of £40.9m.
I think this is a decent result, especially as Bentley now says that results for the current financial year should be “materially ahead of our prior expectations.” This explains why Mitie’s share price is rising today.
What’s it worth?
The stock market always tries to look ahead and price-in companies’ expected future performance. In Mitie’s case, forecasts before today suggested the company would generate earnings of 4.9p per share in the current financial year. I reckon this can be upgraded to at least 5.4p per share now, based on today’s management guidance.
My upgraded forecast prices Mitie shares on about 14 times forecast earnings. That doesn’t seem too expensive to me at this time. I also believe there are some reasons to think the quality of this business is improving. A £190m rights issue last year has helped to reduce Mitie’s net debt to much safer levels, so future finance costs should be lower.
Meanwhile, the company says it expects an increase in more profitable project work as office buildings are reoccupied.
Mitie share price: should I buy?
I think Mitie’s growing focus on areas such as security technology and renewable energy installations should help to improve its profitability.
But the reality is that the company is still heavily dependent on large, low-margin contracts which require many employees to deliver. Mitie now employs 75,000 people, following the acquisition of former rival Interserve.
Recent history tells us that outsourcers can suffer big losses when contracts don’t go to plan. Although I think Mitie’s share price could continue to rise from current levels, I don’t think this business deserves a premium rating.
In my view, Mitie shares are probably priced fairly at current levels. As a value-focused investor, I’d prefer to wait for a market dip to provide a better buying opportunity.
Roland Head 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.