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

DBRS Ratings Limited (Morningstar DBRS) 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.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation is supported by (1) Mitie's market position as the leading facilities management company in the UK; (2) the Company's diversified customer base and long-term client relationships; (3) Mitie's continued investment in its technological abilities and specialised capabilities; (4) a proven ability to integrate acquisitions; and (5) strong credit metrics including Morningstar DBRS-adjusted cash flow-to-debt of 67%, debt-to-EBITDA of 1.2 times (x), and EBITDA-to-Interest of around 20x as of F2024 (ending 31 March 2024).

The credit rating also considers (1) the highly fragmented nature of the mature facilities management industry in the UK, which results in pressure on margins, as well as limited opportunities for organic growth particularly with consideration for Mitie's geographic concentration in the UK; (2) integration risk as Mitie expects to increase its annual investments in strategic high-margin bolt-on acquisitions to support its growth plan; and (3) forecast net inflationary cost increases of GBP 10 million to GBP 15 million in F2025 (F2024: GBP 6 million), which Mitie may have to absorb.

CREDIT RATING DRIVERS
Morningstar DBRS expects Mitie's credit metrics to continue to support the current credit rating, resulting in a Stable trend. A positive credit rating action would require a material sustained improvement in the Company's business risk profile, such as a notable increase in size and expanded geographic reach, in conjunction with the maintenance of leverage metrics at or below current levels, and operating margins trending sustainably above Morningstar DBRS' expectations. Morningstar DBRS could take a negative credit rating action if there are adverse changes to Mitie's business risk profile, such as heightened levels of competition, inflationary or pricing pressure resulting in operating margins dropping below forecast expectations, and/or loss of major contracts not mitigated by new business wins. Morningstar DBRS could also take a negative credit rating action if the Company displays 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 financial risk profile.

EARNINGS OUTLOOK
Morningstar DBRS forecasts mid-to-high single digit annual revenue growth with Mitie's group revenue trending above GBP 5.0 billion by F2026, supported by net contract wins, inflationary price increases, and acquisitive growth. However, wage inflation and lagged inflationary cost increases are anticipated to pressurise Mitie's margins and limit the benefit from the Company's margin enhancement strategies. As a result, Morningstar DBRS-adjusted EBITDA is forecast to remain relatively flat year-over-year in F2025, followed by moderate earnings growth in F2026.

FINANCIAL OUTLOOK
Morningstar DBRS expects Mitie's cash flow from operations to follow a similar trend as earnings, resulting in positive free cash flow (cash flow after capital expenditures, dividends, and working capital) available to be used toward bolt-on acquisitions and share buybacks in line with Mitie's capital allocation framework. Morningstar DBRS also takes into consideration the Company's capacity to complete debt-funded capital allocation activities within its current financial policies. With these considerations, Morningstar DBRS expects Mitie's key financial metrics to slightly weaken from current levels, though remain supportive of the current credit rating, including Morningstar DBRS-adjusted cash flow-to-debt greater than or approximately equal to 60% and Morningstar DBRS-adjusted debt-to-EBITDA less than 1.4x.

CREDIT RATING RATIONALE
The stable nature of Mitie'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. The Company has also been successful in passing through inflationary cost increases to customers, which contributed to improved EBITDA margins in F2024 despite the high inflationary environment and the non-recurrence of higher-margin short-term COVID-19 and Afghan relocation contracts from the prior year. F2024 was a record year for the Company with group revenue (excluding share of revenue of joint ventures and associates) of GBP 4.4 billion and Morningstar DBRS-adjusted EBITDA of GBP 260 million, compared with revenue of GBP 3.9 billion and Morningstar DBRS-adjusted EBITDA of GBP 206 million in F2023. Mitie had solid liquidity reserves as of F2024 including cash and cash equivalent of GBP 245 million and an undrawn GBP 250 million revolving credit facility (RCF). Year-to-date to 30 June 2024 (Q1 F2025), Mitie has reported that revenue grew by 10.5% driven by the prior year's acquisitions, an increase in projects and variable work, and pricing.

The Company's contract renewal rates have historically been high at more than 90% in recent years. The F2024 renewal rate decreased to 79% because two contracts were not renewed (one due to pricing and the other seeking an international provider). Notwithstanding, Mitie's overall wins increased 44% year-on-year to GBP 6.2 billion resulting in an 18% uptick in its order book to GBP 11.4 billion as of F2024. Mitie's customer net promoter score (cNPS) increased by 18 points to +60 in F2024, evidencing a high calibre of service delivery and solid customer satisfaction, which should support ongoing client retention. During Q1 F2025 Mitie won, extended or renewed a number of contracts with total contract value of up to GBP 2.0 billion, compared with GBP 1.1 billion in Q1 F2024.

In recent periods, Mitie's reported average daily net leverage has been below its targeted financial policy of 0.75x to 1.5x. Going forward, Mitie has stated that it intends to operate within its targeted net leverage range following investment decisions guided by its capital allocation framework, which prioritises a progressive dividend, the market purchase of shares to fulfil employee incentive schemes, strategic infill acquisitions in high growth markets, and the return of surplus funds to shareholders. Year-to-date, Mitie has announced a GBP 100 million share buyback programme (of which GBP 25 million has been completed) as well as an agreement to acquire ESM Power for a maximum consideration of GBP 8.5 million (including initial cash consideration of GBP 5.5 million), which is expected to complete on 31 July 2024.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) -https://dbrs.morningstar.com/research/427030

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
A) Weighting of BRA Factors
In the analysis of Mitie, the relative weighting of the BRA factors was approximately equal.

B) Weighting of FRA Factors
In the analysis of Mitie, the relative weighting of the FRA factors was approximately equal.

C) Weighting of the BRA and the FRA
In the analysis of Mitie, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Services Industry (15 April 2024) - https://dbrs.morningstar.com/research/431185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024 ) - https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (15 April 2024) - https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) - https://dbrs.morningstar.com/research/427030

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

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for this credit rating include Mitie's F2024 Annual Report and Accounts, the Company's full-year F2024 results and presentation, Mitie's Capital Markets Day Presentation dated 12 October 2023, information and news updates available on Mitie's website, and information and documents provided by the Company to Morningstar DBRS, including a corporate presentation dated 9 July 2023 and other email clarifications. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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://dbrs.morningstar.com/research/436751.

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: Anke Rindermann, Managing Director
Initial Rating Date: 10 June 2021
Last Rating Date: 28 July 2023

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

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