Mitie Group PLC (LON:MTO) (LSE:MTO.L) has released a trading update. From 1 April to date, Mitie has experienced the effects of significant economic pressures. Among them are changes to labour legislation, public sector budget cuts and lower forecast UK economic growth rates. Mitie has therefore made cuts to its costs and has changed the way it operates in order to overcome the short term challenges.
Despite contract awards since 1 April, Mitie now believes that the pressures it faces will impact on its trading results for the 2017 financial year. It expects revenue to be modestly lower in H1 than in H1 of financial year 2016 and EBIT to be very significantly lower. The main cause of this is a reduction in higher margin project work volumes and discretionary spend by clients, pricing and cost pressure, as well as the costs of implementing efficiency programmes.
For the full 2017 financial year Mitie expects revenues to rise slightly on financial year 2016. However, EBIT is expected to be materially below management’s expectations due to the challenges it faces and the cost of implementing efficiency programmes. They could total £10 million but may deliver up to £15 million of savings in H2.
Mitie has declined by 22.6% today. This takes its fall for 2016 to 34%, which is a worse performance than fellow UK-focused companies such as Tesco PLC (LON:TSCO), Next plc (LON:NXT), Lloyds Banking Group PLC (LON:LLOY) and J Sainsbury plc (LON:SBRY). Tesco is up by 16%, but Lloyds has declined by 22%, Next is 31% lower and Sainsbury’s has slumped by 6%.
In my view, Mitie faces a difficult outlook and it will take the company time to improve its financial performance. It has a P/E of 8.2 using last year’s EPS but this will likely rise if its EPS falls. Therefore, I’ll add it to my watchlist but won’t be buying it at this moment in time.