Mitie sees higher turnaround costs, tough year ahead

(Reuters) - British outsourcing company Mitie Group (MTO.L) said on Friday it expected annual costs associated with its turnaround programme to be higher than previously estimated and added that the year ahead would remain "challenging".

Shares in Mitie fell as much as 8.3 percent to 147.9 pence on Friday, hitting their lowest level in nearly 13 years.

Mitie, which took its property management unit off the market in December after putting it up for sale, said on a conference call with analysts that the unit had not performed as well as it had hoped.

The company raised its estimate for costs related to its turnaround - dubbed Project Helix - to about 35 million pounds for the year to March 31 from a previous estimate of 24 million. [nRSP9148Ha] The project would now deliver savings of around 50 million pounds by March 2020, up around 10 percent from the previous guidance.

Mitie shares closed down 3 percent on Friday.

The provider of pest control, cleaning, security and healthcare services is restructuring after a string of profit warnings, which it has blamed on rising costs and uncertainty relating to a number of factors including lower UK growth rates, public sector budget constraints and Britain's planned exit from the European Union.

"Whilst management is clearly trying to do the right things ..., there appears to be limited tailwinds from its end markets and, in our view, this turnaround could be more protracted than originally thought," RBC Capital Markets said in a note to clients.

Mitie also said on Friday that it expected to report a rise of 2-2.5 percent in full-year revenue to 2.2 billion pounds ($3.07 billion).

The company said organic growth in the year had been hurt by weak performance in its property management unit and contract losses in its professional services unit.

Like peers such as Capita (CPI.L) and now-bankrupt Carillion (CLLN.L), Mitie has been hit by rising UK labour costs.

"The liquidation of Carillion has raised some fundamental questions about the outsourcing industry," Chief Executive Officer Phil Bentley said.

Carillion collapsed in January when its banks pulled the plug, after costly contract delays and a slump in new business left it swamped by debt and pensions liabilities. [nL8N1PA0QA]

Mitie, which is scheduled to report its annual earnings on June 7, said it expects its financial year-end net debt to have risen by 50 million to 70 million pounds. It said it expects to continue to operate within its banking covenants.

Britain's Financial Reporting Council (FRC) has launched a investigation into how Mitie's 2015-16 financial statements were prepared and approved, Mitie said in November. [nL8N1NQ1AG]

($1 = 0.7163 pounds)

(Reporting by Radhika Rukmangadhan in Bengaluru; editing by Gopakumar Warrier/Jason Neely/Alexander Smith)