Mitie Group is the UK’s largest facilities management (FM) company and it joined my personal portfolio and the UK Value Investor model portfolio way back in 2011.
In layman’s terms, Mitie provides corporate and government clients with outsourced services (mostly property-related such as maintenance, security and cleaning) so that its clients can focus on their core activities rather than non-core activities like fixing a boiler or cutting the grass.
When I bought Mitie in 2011, it had a long track record of impressive and steady growth, and that’s largely why I invested (my investment criteria are now much more demanding).
But that was then and this is now, and over the last few years Mitie and other large diversified outsourcing conglomerates (notably Capita and Carillion) have run into all sorts of problems.
Mitie began its turnaround journey in 2017 with a dividend cut from 12p to 4p, and that’s where the dividend remains today.
That turnaround process is now largely complete, so the next few years will be the litmus test as to whether all the hard work restructuring the business has been worthwhile, and whether the dividend can be increased back to previous levels and beyond.
Personally I’m mildly optimistic, and I’ve outlined why at some length in this month’s Master Investor magazine:
John, The turnaround CFO just handed in his notice. Now given that he joined in 2017 when the share price was between 200 and 280p a share, his turnaround hasn’t, well turned around, and he’s going.
If, as the share price today suggests falling to 151p, it was such a sure fire turnaround success then he’d be staying for the rewards and or the glory. He’s taken another job. Maybe he didn’t have a choice, who knows?
If this was in my portfolio, I’d probably sell immediately without giving it too much more time and effiort.
Service business to Government (I appreciate they are reducing this) or large Corporate Clients are treated like dirt – they are whittled to the bone on price and have stiff penalty clauses for anything they don’t deliver or fail to deliver on time.
With profit margins of 3% it’s always going to be a struggler. It has insignificant to no ROCE and it has a debt ball still to contend with.
With so many good, high margin, strong brand/IP position companies out there with high customer retention capability it seems like an opportunity to redeploy the cash that’s left, while there still is some left that is.
Harsh response I suspect, but from investment perspective, it has to be low on the list, no?
John Kingham says
Hi LR, I can see you’re not a fan!
“it has to be low on the list, no?” – You’re right, Mitie doesn’t rank well on my stock screen at all, because of its low growth, low ROCE, high debts etc.
As the saying goes, “if I were you I wouldn’t start from here”, and if I wasn’t already a shareholder I wouldn’t buy Mitie. But I am a shareholder, and I am starting from here, which is why I decided to do a reasonably lengthy review of the company.
The upshot is that even though this isn’t the sort of company I’d want to buy into, I do think the company’s likely to “turnaround” over the next five years or so (where likely means >66% estimated probability, as per IPPC
We shall find out how wrong (or perhaps even right) I am in due course.
Hi John, You could well be more than right and you could eventually get out unscathed and in profit. However, if you were to consider the money as a free cash and had the choice of investing it in Mitie or another stock ranked in your top 25, what would you do?
Given that Mitie is a liquid stock, the equity could be free cash at the press of a button?
Surely psychology stops you pressing the red button.
I applaud your decision on Dunelm by the way, I was wrong on that one.
But then again I hold my hands up and admit I’ve been wrong enough times to know that “I don’t know” as Buffet often eludes to.
Nice bounce on IGG this week – that one has now served me well from a timing perspective.
We just need some respite for Ted Baker as well. WPP looks like it’s getting back in range, considering there is a planned capital return from the Kantar sale. I quite like the new CEO, he seems to be a lot less arrogant than his former boss and has decided to sell or close many of the fragmented parts of the business that are less technically savvy and focus of the core of the electronic marketing which he was formely in charge of. The dividend looks secure, for now at least – perhaps this will be a winner in a normal market.
Is there such a thing?
Have a great weekend!
John Kingham says
“However, if you were to consider the money as a free cash and had the choice of investing it in Mitie or another stock ranked in your top 25, what would you do? Given that Mitie is a liquid stock, the equity could be free cash at the press of a button? Surely psychology stops you pressing the red button.”
It’s a good point and there’s definitely a risk that I’m sticking with Mitie because of a) trying to avoid locking in a loss (sunk cost fallacy) or b) trying to avoid looking like an idiot (closely related to the previous point).
However, I have thought about this and tried to dissect my own motives, and I don’t think I’m sticking with Mitie for egotistical reasons.
I try to view each existing investment from an outsider’s perspective. In other words, if someone hired me to analyse their existing position in Mitie, what would I suggest they do? And whatever I’d suggest they do, that’s also what I should tell myself to do.
So with Mitie, it isn’t something I’d put fresh money into if I wasn’t an existing shareholder because I don’t like to invest in turnaround situations. There’s nothing intrinsically wrong with turnarounds; I’d just rather not get involved in them. But I am invested in a turnaround situation (Mitie), so I have to deal with that reality, and since I’m already invested, I decided to do a reasonably deep review of the company to help me decide my next move.
And having done that reasonably deep review, I came away still liking many aspects of the company (market leading position, scale, brand, increasing focus on FM, goal of moving to larger more complex contracts with higher margins, several major competitors have gone bust, etc), although there are downsides (FM is a low margin business where reasonable ROCE is hard to produce, the government is a major client, too much debt, too much pension, several major competitors have gone bust, etc).
Finally, the valuation is very low if you assume that anything like its previous ‘normal’ performance is achievable within the next five or ten years. I think a return to normal performance levels is likely (>66% estimated probability) and so I think a recovery of the dividend and a re-rating of the share price are also likely.
And given that, I think Mitie is as good a ‘bet’ as anything else in my stock screen’s top 25. It isn’t the best company by a long shot, but at its current price it doesn’t need to be. It only needs to not make a complete mess of things. Whether that happens or not we will (as usual) have to wait and see!
As for the other companies, I agree that Mark Read (new CEO at WPP) seems to be a much less ‘iconic’ figure than Martin Sorrell, which is usually a good thing.
Hope you have a good weekend too; I’m just off to sit on the beach and enjoy the mid-September sunshine.
Steve Kirk says
Yes, a very disappointing investment for me too. I was taken in by the impressive history of growth and invested in 2014 and 2015 when any dip in performance looked like a buying opportunity. But since then I’m nursing 50% capital loss only slightly offset by 10% cumulative dividend return. It’s been on my ‘plan to sell’ list for a while but recent good share price performance has stayed my hand in the hope of recouping some of my losses. My concern is that the turnaround is running out of steam and management may not be as enlightened as you in their desire to cut debt and improve margins.
Lesson learned is to be more demanding of balance sheet strength and margin of safety in ROCE and profit margins. Which I think it also your view on things.
It’s so frustrating when companies that have performed well for five or more years manage to implode by taking on too much risk or being unable to manage the size of business they have grown to.
Good article as always and will influence my next sell or hold decision for Mitie.
John Kingham says
Hi Steve, thanks, and yes my lessons learned are similar to yours.
As for the turnaround running out of steam, my view is that it’s progressing well and is likely to bear some initial fruit in the next few years, so I expect to hold on until that belief is either confirmed or shattered.