Canaccord downgrades MITIE, slashes target price

Any major collapse in MITIE´s share price would provide a longer-term opportunity, but shorter-term there were various uncertainties which needed to be resolved, Cannacord Genuity said.

The company´s Facilities Management business was still attractive, and opportunities were still present for it to benefit from being the UK´s largest player in the space, alongside "significant scope" for self-help within the business.

The outsourcer´s average free cash flow of £50m per year over the past decade should underpin the stock to an extent once it exits its Care unit, analysts Matthew Walker and Aynsley Lammin said in a research report sent to clients.

A long-term margin of 5% also looked achievable, they said, so given that the shares were trading on an enterprise value-to-sales (ex Care) ratio of 0.5 "any major collapse in the shares does provide a longer-term opportunity".

However, there remained uncertainty around trading in fiscal year 2018, new management was likely to review its future strategy in early 2017 and speculation around the company´s leverage, given the potential cash costs of exiting its Care arm, left the analysts "less positive" in the short-term.

As an aside, Cannacord expected MITIE to set a full-year target of 2.1 for its earnings cover.

Hence their decision to cut their target price on the shares from 270p to 195p, which was ten times´ their estimate for MITIE´s earnings per share in 2010, and to downgrade their recommendation from a 'buy' to a 'hold'.