Mitie share price bounces after £12.4m Custom Solar acquisition

Mitie’s stock price has seen upwards momentum so far in June after the facilities and buildings management company announced it had acquired solar power firm Custom Solar. The deal forms part of Mitie’s acquisition strategy, which has enabled it to boost share buybacks and strengthen its long-term value.

Mitie’s [MTO.L] share price has been on an upward trend since telling investors on 9 June that it acquired Custom Solar for an initial £8.8m with an extra £4.4m in deferred payments due by 2025.

“Custom Solar’s expertise in large scale commercial solar deployments, combined with Mitie’s high voltage connection and project management expertise, will enable us to offer end-to-end renewable power generation at scale,” Simon Venn, Mitie’s managing director of technical services, said.

Through its decarbonisation business, Mitie has helped to install solar panels and air source heat pumps at offices of Lloyds Banking Group [LLOY.L], Vodafone [VOD.L] and Rolls-Royce [RR.L].

The Custom Solar acquisition news coincided with the release of full-year earnings. A strong financial performance has enabled Mitie to leverage “its capital base to focus on long-term value creation” as well as “delivering enhanced shareholder returns.”

The Mitie share price jumped sharply on the back of earnings before retreating slightly. The stock is down around 4.5% year-to-date but has recovered from setting a 52-week low of 44.7p on 7 March to close on 22 June at 60.2p. The stock has performed well in the past month, gaining 9.1% since the start of June.

Cash flow fuels investment and dividend payout

Mitie swung to an annual profit in the year ending 31 March 2022. Its pre-tax profit was £52.3m versus a loss of £13.7m in fiscal 2021. Total revenue climbed 58% to £3.99bn from £2.53bn the year prior.

Increased profitability and improvements made to lower working capital meant free cash flow came in at £133m, up from an outflow of £25m in 2021. This, combined with raising £40m by disposing of its document management business to Swiss Post Solutions in August last year, means Mitie has the fuel to focus on investing in faster growing businesses that have the potential to deliver higher returns.

Acquisitions in fiscal 2022 included security and surveillance intelligence specialist Esoteric; DAEL Ventures, a provider of telecoms infrastructure; and decarbonisation businesses Biotecture and Rock Power Connections. Mitie invested £27m in total in the four companies.

“Through our investment-led strategy, Mitie has reached an inflection point earlier than anticipated,” CEO Phil Bentley wrote in a statement accompanying the FY22 results.

This has put the company in a position to reinstate its final dividend, having not paid out during the pandemic. The final dividend recommended of 1.4p per share would take the total payout for the year to 1.8p, a yield of just under 3% based on the most recent closing price. This is set to be paid out in August. Also announced on 9 June was a £50m share buyback programme.

Growth outlook looks strong for Mitie stock

Mergers and acquisitions are expected to continue fuelling future growth and Mitie is confident about its outlook for the years ahead. Bentley is forecasting the company to deliver mid-to-high single digital revenue growth in 2023 along with “good operating margin progress”.

“Our strategy – focused on accelerating growth, enhancing margins and improving cash generation – is creating a strong platform to further improve earnings,” he said.

Fiscal 2023 has got off to a strong start with contract wins with property developer and investor Hammerson [HMSO.L], Netflix [NFLX] and Primark, which is owned by Associated British Foods [ABF.L], as well as budget retailer Poundland. Bentley said Mitie had also been boosted by existing contracts, including with defence giant BAE [BA.L].

“The impact of inflation on our business continues to be well managed and we will see further benefits this year from our margin enhancement initiatives,” Bentley added.

While Mitie hasn’t received any analyst ratings recently, it has three ‘buy’ and one ‘hold’ rating issued in the past 12 months, according to MarketBeat data. The consensus target for the Mitie share price is 88.25p, implying an upside of 43.3% from the 22 June closing price.