Outsourcing company Mitie (MTO) has been forced to write down millions of pounds from contracts after a financial review of is books.
The result is that the board of Mitie expects to write down its balance sheet by between £40m and £50m. The market has reacted well to this news, presumably in relief that things are not worse. The company's share price is up by almost 4% to 219.8p, although the stock remains a good 15% down over the past 12 months.
KPMG found that Mitie's book balancing complies with relevant accounting standards. But the big four accountancy also called its methods ‘less conservative’ than others in the market.
The company's most recent humiliation was losing 16% of its value after issuing a profit warning in January.
The write downs consist of £30m to £35m in accrued income, £10m to £12.5m of intangible asset with only a £6m cash component. The company says that the non-cash write downs of trading assets will have 'no impact on the future profitability of the business'.
Mitie will also restate profits for 2016 down by between £10m to £20m due to ‘material errors’. The company anticipates a similar increase in this year’s results. Full year to 31 March 2017 results are now pencilled in for 12 June, the same day of a proposed extraordinary general meeting (EGM) where it hopes to gain shareholder support for changes to the company's borrowing caps to provide short-term flexibility. It wants the limit raised to £1.5bn.
Debt
Mitie’s net debt at year end 31 March 2017 was £146m, well below the £200m figure investment bank UBS had expected. This puts Mitie well within its debt parameters arranged with its creditors at 31 March 2017.
The company’s trying to negotiate an amendment to its banking covenants, or limits, to allow for one-off charges and remove the risk of any technical breaches. Mitie is planning to take a more 'cautious approach' to its accounting as it moves to another accounting standard, IFRS15.
In terms of an investment, UBS gives Mitie a ‘neutral’ rating. It values the company using a target free cash flow yield of around 9% and thinks investors will question the company’s ability to drive long-term profit growth. The company is also highly dependent on the UK which makes up for over 97% of its revenues, this lack of diversification could harm Mitie. The firm’s most recent chief executive Phi Bentley is bullish, saying Mitie remains a ‘strong and successful business’ although concedes 2017 has been ‘challenging’.
