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Mitie – shares up on “Trading update” announcement. Positive news then? Er…

By Steve Moore | Wednesday 3 May 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Shares in Mitie Group (MTO) currently trade circa 4% higher on the day, at around 220p, on the back of a “Trading update” announcement. Good news from this “facilities management, connected workspace and professional services business” then. Er…

The announcement includes that “performance, before the impact of the Accounting Review, is largely in line with previous expectations… reflecting what has been a challenging environment”. Hmmm, “challenging environment” is not encouraging and before impact of accounting review?

The latter has followed management change and has seen;

“KPMG commented that our application of percentage of completion accounting and costs of contract mobilisation is less conservative, albeit still justifiable, than others in the market. In response to these findings, and in addition to the £14m of one-off charges identified in the January trading update, the board currently expects to write down its balance sheet by between £40m and £50m. Of this total, only £6m relates to provisions which are expected to result in cash outflows in FY'18… In addition, the review has identified a number of material errors which may necessitate restating our FY'16 accounts.”

Not a great sign of clear accounting here then! And there’s worse;

“As the company expects to have only limited headroom under its covenants as at 31st March 2017, the company intends to engage with its lenders with a view to negotiating an amendment to our banking covenants… these changes would also enable the company to review its accounting policies in respect of percentage of completion contracts and mobilisation and take a more cautious approach in advance of adopting IFRS15 Revenue from Contracts with Customers.”

So taking a more prudent approach will see current debt covenants breached and is also seeing the company consider it necessary to raise borrowing limits from 2x reserves (going to a fixed amount of £1.5 billion to be put to a 12th June EGM).

December-commenced CEO Phil Bentley argues that “Mitie remains a strong and successful business, and is continuing to deliver for our customers… We have appointed a new Executive Leadership Team  with a new way of working  and we are confident the business will generate significant shareholder returns over the forthcoming years”.

I though also note “the costs of change have increased by £5m to £15m since January as some further 160 roles have been removed in the first wave of a new cost reduction programme” - and it all looks something of a mess here. You were though warned – for example, Matt Earl in early 2015 HERE, with more recent views from Lucian Miers HERE and HERE.

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