DBRS Morningstar Confirms Issuer Rating on Mitie Treasury Management Ltd. at BBB, Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed its Issuer Rating on Mitie Treasury Management Ltd. (MTM) at BBB with a Stable trend. MTM is a direct wholly owned subsidiary of Mitie Group plc (Mitie or the Company) and the financing vehicle for the Company. Mitie is a facilities management company offering a range of services across the public and private sectors, primarily in the UK.

KEY CREDIT RATING CONSIDERATIONS

The rating confirmation is supported by (1) Mitie's strong position as the leading integrated facilities management company in the UK; (2) the Company's diversified customer base and long-term relationships supported by high contract renewal rates; (3) Mitie's continued investment in its technological abilities and differentiation strategies; (4) a proven ability to integrate acquisitions, including the transformational acquisition of Interserve in F2021; and (5) strong credit metrics including DBRS Morningstar-adjusted cash flow-to-debt of 57% and DBRS Morningstar-adjusted debt-to-EBITDA of 1.4 times (x) in F2023 (ending 31 March 2023).

The rating also considers (1) the highly fragmented nature of the mature facility management industry in the UK, which results in pressure on margins, as well as limited opportunities for organic growth; (2) integration risk as Mitie continues to target strategic high-margin bolt-on acquisitions to support its growth plan; (3) expected inflationary cost increases of around GBP 20 million in F2024 (F2023: GBP 7 million) which Mitie may have to absorb; and (4) potential execution risks and timing uncertainties of ongoing profit enhancement initiatives.

CREDIT RATING DRIVERS

DBRS Morningstar expects Mitie's credit metrics to continue to support the current rating, resulting in a Stable trend. DBRS Morningstar could take a positive rating action if, all things being equal, the Company maintains leverage metrics at or below current levels and its operating margins trend sustainably above our expectations, and/or there is material and long term strengthening in Mitie’s business risk profile. DBRS Morningstar notes that the Company’s financial risk profile is stronger compared with its business risk profile and thus the Company has resilience to withstand some adverse financial fluctuations while continuing to support the current rating, all else being equal. However, DBRS Morningstar could take a negative rating action if, all else being equal, the Company’s operating margins trend below our expectations and/or its credit metrics deteriorate outside of our base case assumptions. DBRS Morningstar could also take a negative rating action if the Company were to display more aggressive strategies including pursuing acquisition opportunities outside its core expertise, more aggressive financial policies, or excessive debt funding resulting in a weaker-than-expected credit risk profile.

CREDIT RATING RATIONALE

The stable nature of the Company’s contracted revenue earned from the provision of largely essential services – with a high proportion of fixed to variable contracts – provides stability in varying economic conditions. In F2023, Mitie achieved a largely flat performance year-over-year with net revenues (excluding share of revenue of joint ventures and associates) remaining relatively stable at around GBP 3.9 billion and F2023 DBRS Morningstar-adjusted EBITDA of GBP 206 million (F2022: GBP 211 million), evidencing underlying growth in the business in F2023 when considering the non-recurrence of circa GBP 448 million of revenue associated with the short-term, high-margin Coronavirus Disease (COVID-19) contracts in the previous year. Moreover, Mitie has demonstrated a commitment to its financial policies, which results in strong credit metrics. The Company also benefits from a strong liquidity position of GBP 390 million, inclusive of cash and cash equivalents of GBP 248 million as at F2023.

Year-to-date to 30 June 2023 (Q1 F2024), Mitie reported year-over-year gross revenue growth of 11.4% to GBP 1.1 billion due to increased projects and variable work, contract re-pricing, and growth from acquisitions. The Company continues to deliver on its capital allocation strategy, including two acquisitions completed for a total consideration of GBP 21 million, as well as GBP 16 million deployed toward its F2024 GBP 50 million share buyback programme. As a result, Mitie reported an increase in Q1 F2024 closing net debt (as defined and reported by the Company) to GBP 99 million (F2023: GBP 44 million).

Looking forward, DBRS Morningstar's forecast considers mid-single digit annual revenue growth with net revenue trending toward GBP 4.4 billion by F2025. For F2024, DBRS Morningstar estimates that inflationary cost impacts will be largely offset by cost-saving initiatives, net wins, and acquisitive growth, with F2024 DBRS Morningstar-adjusted EBITDA expected to be relatively flat year-over-year, and moderate growth in F2025. DBRS Morningstar expects DBRS Morningstar-adjusted cash flow from operations to follow a similar trend, resulting in positive free cash flow (cash flow after dividends, capital expenditures, and working capital) to be used toward Mitie's capital allocation activities including bolt-on acquisitions and share buybacks. DBRS Morningstar estimates that the Company will make multiple bolt-on acquisitions each year resulting in materially higher cash outflows for this purpose than in the last two years. The DBRS Morningstar forecast also considers the Company's available headroom in its existing debt facility and its capacity to complete debt-funded acquisitions within its current financial policies.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (04 July 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in British Pound Sterling unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
• “Global Methodology for Rating Companies in the Services Industry” (14 February 2023) - https://www.dbrsmorningstar.com/research/409773/global-methodology-for-rating-companies-in-the-services-industry

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The primary sources of information used for this credit rating include the Company’s Consolidated F2023 Annual Report and Accounts, F2023 Results Statement, F2023 Results Presentation, F2023 Recording of Presentation and Q&A, Q1 F2024 Trading Update, information and news updates available on Mitie’s website, and information and documents provided by the Company to DBRS Morningstar, including a corporate presentation dated 19 June 2023 and other email clarifications. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417873.

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Chloe Blais, Assistant Vice President
Rating Committee Chair: Tom Currie, Managing Director
Initial Rating Date: 10 June 2021
Last Rating Date: 29 July 2022

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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