Stifel upgrades Mitie to 'hold' as valuation becomes 'difficult to ignore'

Analysts at Stifel took another look at Mitie after the group's recent share price weakness, and although their fundamental view of the company was unchanged, leading them to leave their price target on the group at 186p, they chose to up their stance on the facilities manager from 'hold' to 'buy'.

Stifel said Mitie's valuation was "difficult to ignore" and, despite its strategic transformation proving to be more difficult than expected and the challenging market backdrop, the analysts still viewed the group positively given its attempts to improve its proposition, tackle leverage head-on and deliver double-digit earnings.

Changing hands at 7.8 times' Stifel's estimates for the company earnings in 2019 and at an EV/EBITDA multiple of 5.9, the stock was trading at a greater than 20% discount versus the 10-year average for each of those metrics and at their cheapest since 2010.

The American broker also noted that Mitie's interim results in November could provide a near-term catalyst, with a greater drop-through of cost savings set to be "a key lever" for improving investor sentiment.

"We believe our 10x FY19E EPS valuation is a fair reflection of the opportunities and current market challenges, and undemanding for a business forecast to deliver a double-digit earnings CAGR on conservative forecasts," Stifel's analysts said.

While the analysts remained cautious on customer's willingness to pay for a wider technology offering, Stifel they still expected cash flow generation to become "increasingly attractive" after working capital normalises and the costs of change decline.