Though Mitie insists that it can keep margins at between 5 per cent and 6 per cent, some in the market don’t believe it.
The company faces several challenges, not least the poor prices it is getting for providing healthcare for local authorities, which tipped that side of the business into a loss in the year to the end of March.
Mitie is blaming cuts in central government spending. There has been an increase in council tax of up to 2 per cent to fund increasing social care costs, but much of this will be absorbed by the national living wage. It has cut back on the number of branches from which it operates and the business will be returned to profitability in due course, but some of us can remember when healthcare was supposed to provide the engine for growth.
Elsewhere the company is doing well enough. The vast majority of its work is in facilities management and margins there were a sufficiently robust 6.3 per cent.
Mitie is now well out of the low-margin construction industry and is a pure services business. However, there are pressures on this, not least the economic uncertainty in Britain, where almost all its work is. The fast-approaching European Union referendum is also cited as a factor.
Another concern is the falling pipeline of new work. This has dropped from £9.7 billion to £9.1 billion over the year, with a fall in the order book from £9 billion to £8.5 billion. Once the above uncertainties are resolved, this should start to build again.
On the positive side, the dividend is up for the 27th year in a row. With the shares where they are, up 16½p at 290p but well below their peak at the end of last year, the forward yield is an attractive 4.2 per cent.
By its very nature Mitie is highly cash-generative. It is, therefore, launching a share buyback programme. At an initial maximum of £20 million, against a market capitalisation of about £1 billion, this is not going to move the dial, but it probably indicates a degree of frustration on the part of management over the sluggish share price.
The shares sell on 11 times earnings. This looks low for the sector, but I do not see those market concerns shifting soon.
MY ADVICE Avoid
WHY The dividend yield is a good one and the core business is performing well, but there is some negativity in the market
Inmarsat
It can safely been said that it has not been the best couple of weeks for Inmarsat. A fortnight ago the satellite operator put out first-quarter figures that warned of challenging headwinds in the market, although its Global Xpress array of three satellites is up and running and a fourth is set to go up at the end of the year to provide greater coverage.
There was some confusion, too, over the announcement of a contract win for a rival provider from British Airways, where Inmarsat already has a relationship through a venture with Deutsche Telekom. Some apparently believed (wrongly) that the contract had been lost.
Then came a poor trading update from Eutelsat, another rival, which led analysts to query Inmarsat’s version of events and worry that overcapacity in the satellite market was worse than had been feared, with too many high-performance satellites up and running.
Yesterday Morgan Stanley came out with a negative note suggesting that management’s guidance for a 2 per cent rise in revenues this year was too ambitious. The shares, always volatile, fell another 30½p to 724½p. They are back from a high of about £11.50 since the start of the year.
The main weakness has been in the global maritime market, as ships are taken out of service and no longer need Inmarsat’s products, and in oil and gas, inevitably. The shares sell on 17 times earnings. On the assumption that the worst is past and the market is taking too pessimistic a view, that looks like a good entry point for a highly speculative buy.
MY ADVICE Buy
WHY The share price fall looks overdone
De La Rue
De La Rue’s full-year figures today shouldn’t contain too many surprises, the company having already forecast operating profits for the year to the end of March of £62 million. The Cash Processing Solutions business was already under review and could have been closed; De La Rue has managed instead to offload it to a private equity buyer, which provides a clean exit and means there will be no closure costs. The business is going out for a nominal £2.1 million, with another £1.5 million payable in due course and perhaps another £6.5 million to be paid if certain targets are reached.
This is about as good as can be expected; cash processing swung into a £8 million operating loss for the last financial year and the company lacks the critical mass in a market that is highly competitive and dominated by two larger players.
De La Rue has been cutting back on production at its core banknote printing business by about a fifth. The sale of the cash processing business can only be a positive and the shares gained 24p to 510p. The yield is an attractive 4.9 per cent, but on 13 times earnings the shares look fully valued ahead of today’s figures.
MY ADVICE Avoid
WHY The earnings rating suggests little upside for now
And finally
That earnings warning, if such it was, from Spectris on Friday was taken badly by the market. The maker of sophisticated measuring equipment, which has been tipped before in this column, warned of a 4 per cent fall in like-for-like sales. The shares lost 4 per cent of their value on Friday. They recovered a touch yesterday as Numis Securities put out a positive note. The company is working on getting costs under control and, as Numis says, any upturn in the industrial cycle can ony be to the company’s benefit.
