Mitie delivers another profit warning, exits care business

As well as reporting a slide into losses in the first half and cutting its dividend, facilities management group Mitie said the second half should see an improvement but the full year turnout will still fall short of expectations.

The FTSE 250-listed company has taken the decision to withdraw from the domiciliary healthcare market, placed this business under strategic review and written off all healthcare goodwill and intangibles, as the division reels from downward pressure on rates and a reduction in care volumes.

Performance in the six months to 30 September was hit by changing market conditions, the company had warned two months ago, with companies across the UK adjusting to rising labour costs and economic uncertainty by making short-term reductions in higher margin project work and discretionary spending.

Although revenue fell just 2.6% to £1.09bn, the change in mix and lower discretionary spend saw margins squeezed and operating profits slid 39% to £35.4m, while the write-offs in healthcare saw Mitie plunge into a £100.4m pre-tax loss compared to a £45m profit a year ago.

This reflected a £128.1m of charges, including impairments and writing off of healthcare goodwill and acquisition-related intangible of £117.2m and restructuring costs of £6.0m.

"The first half of this year has been difficult but we are not alone in facing significant macroeconomic challenges," said chief executive Ruby McGregor-Smith, who is stepping down next month after ten years at the helm.

"The steps we have taken to counter these impacts include the restructuring of both frontline and support functions across FM and the decision to withdraw from the domiciliary care market."

As the previous year's earnings per share revered into a 29.5p loss, the interim dividend was cut to 4p from 5.4p last year.

Performance is expected to improve in the second half of the year under the new operating model that has been put in place to adapt to market conditions, with enhanced revenue visibility from new contract awards and retentions, good momentum in levels of project work and the anticipated incremental benefits in the second half from restructuring programmes of £10m compared to the the first.

Analysts at Canaccord Genuity said although there has been some improvement since the profit warning in September "it remains too soon to predict an immediate bounce back in discretionary project work given the market backdrop, and gross margins may come under further pressure into FY18 as another year of NLW wage costs must be absorbed by the customer base alongside potential additional cost from the introduction of the Apprenticeship Levy".

The broker calculated that 8p will be the dividend target for the full year, a 35% reduction to earlier expectations, and said while the underlying FM business is still attractive due to potential for self-help and solid cashflow, the uncertainty remaining
around trading next year and new management likely to review future strategy in early 2017, it was less positive in the short-term.