U.S. Markets closed

Mitie recovery efforts hit by softer order book, profit miss

By Noor Zainab Hussain

(Reuters) - Mitie Group Plc on Thursday forecast a rise in annual profit for 2018 that was lower than market expectations and said its order book was set to weaken around 10 percent, sending shares in the British outsourcer down more than 9 percent.

The weakness in Mitie's order book comes amid heightened uncertainty over Brexit and at a time when Britain's outsourcing sector has its back against the wall, with the high-profile demise of Carillion increasing scrutiny of the sector.

Chief Executive Officer Phil Bentley flagged a backdrop of "undoubted" challenges and said short-term economic worries were impacting clients' capital programmes and willingness to enter into longer term contracts.

"When contracts get renewed, in the past they were more like five or seven year contracts, but they are more like three-five year contracts now ... Clients aren't writing such long orders anymore," he told Reuters.

"(In 2017) we had a couple of big orders around government contracts. This year we haven't had any," he added, referring to the 2018 financial year.

Mitie was recently deemed an approved government supplier, and Bentley said he expected to win more government contracts in 2019. He also stressed that some 40 percent of Mitie's revenue comes from outside its order book, from more variable project work or added value services rather than long-term fixed cost contracts.

Mitie is less dependent on public sector work than some of its outsourcing rivals. It employs 49,000 people across Britain, looking after banks, retailers, hospitals, schools and government offices.

The company's shares, however, fell 42.8 percent in 2018 and, despite recovering some of their initial losses, were 4.7 percent lower on the day at 142.9 pence by 1249 GMT.

Bentley said that the collapse of Carillion and the stepping in of creditors at another peer, Interserve, had hurt sentiment around the sector but that Mitie was in a position to emerge strongly from the shakeout.

"We sort of dodged the bullet a couple of years ago and therefore our leverage is much lower and we don't have onerous contracts," he added, highlighting how Mitie was different.

Bentley has been striving to turn the company around by investing in technology, employee retention as well as selling off non-core businesses.

When asked about the progress of the plan, he was satisfied, but said more investment was needed in customer service and talent than originally anticipated.

Mitie, which provides cleaning, security and healthcare services, said earlier that operating profit before other items was expected to be in the range of 84 million pounds to 87 million pounds for the year ending March 31.

Analysts at Jefferies said this was 5 percent below market consensus due to a lack of margin progression.

Bentley said profit was held back by the timing of contract renewals.

The outsourcer, which employs 13 percent of its staff from Europe, also has Brexit contingency plans in place, using new recruiters to ensure it has the access to labour it needs.

The company is storing food and essential back up equipment and changing its menu to British food, Bentley said.

(Reporting by Noor Zainab Hussain in Bengaluru; editing by Patrick Graham and Elaine Hardcastle)