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Is FTSE 250 penny stock Mitie (LSE:MTO) a good long-term investment?

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Investors in outsourcing company Mitie Group (LSE:MTO) have endured a rollercoaster few years. The Mitie share price is far below its all-time highs. Between 1993 and 2014, it climbed. But since then, this FTSE 250 penny stock has been highly volatile. Despite being up 64% year-to-date, the share price remains 59% below its 2014 high.

A penny stock with promise

Nevertheless, since October 2020, the share price has climbed 144%. And brokers have been upgrading their valuations.

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Earlier this month, Mitie released good FY21 results, showing trading resilience and a strengthened balance sheet. Its adjusted pre-tax profit fell to £46m from £69.9m but came in better than analyst predictions.

The company acquired Interserve, a facilities management business, in November. Since then, the acquisition has been performing ahead of expectations. Interserve is a low-margin business, but it’s helped Mitie enhance its footprint.

Mitie outsources a variety of workers including cleaners, security guards, and maintenance teams. With the pandemic creating an unprecedented need for intense cleaning regimes, its staff have been in high demand. And as the reopening accelerates, I think this is likely to continue.

The company is improving its security offerings too with technological advancements and is also an industry-leading AC and renewable energy contractor. These are another two areas of growing interest.

So, the potential for further growth is strong. And the company believes its 2022 profit will be “materially ahead” of its prior expectations.

Notable shareholder

Furthermore, another compelling argument for enhanced interest in this stock is that deep value fund Silchester is its biggest shareholder. Silchester has a close to 15% stake in Mitie, and it recently upped its investment in Morrisons to 15%. Shortly afterward, Morrisons received a potential takeover bid. As such, I think UK investors will be paying closer attention to Silchester’s portfolio in the coming months.

Financial outlook

Mitie has a forward price-to-earnings ratio of 12.7. And a £201m rights issue last summer helped it drastically reduce its net debt, while also funding the Interserve acquisition. But it cancelled its dividend after the pandemic struck and is holding off on resuming it until 2022 at the earliest.

Also worth noting, Project County sold its last 7% stake in Mitie last week. It acquired these shares through the Interserve acquisition and sold them when the lock-up period ended. This means the stock no longer has the potential for dilution (aka overhang) from the Interserve purchase.

All of the above sounds great, but it’s still quite speculative. Mitie is a penny stock emerging from a seven-year struggle. It might continue to rise, but I imagine it wouldn’t take much economic disruption for its share price to tumble. Being a low-margin business makes me nervous too, plus a lack of a dividend to sweeten it makes me reluctant to buy shares in Mitie today.

Besides, there are other FTSE 250 stocks I’d prefer to invest in for long-term rewards. Nevertheless, I do see potential and I’ll keep it on my watch list for now.

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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.

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