DBRS Ratings Limited (DBRS Morningstar) assigned an Issuer Rating to Mitie Treasury Management Limited (MTM or Issuer) of BBB with a Stable trend. MTM is a direct wholly owned subsidiary of Mitie Group plc. (Mitie or Group), and is the financing vehicle for the Group. Mitie is a facilities management company offering a range of services across five business units including Business services, Technical services, Central Government & Defence (CG&D), Specialist services, and Communities, operating primarily in the UK.
KEY RATING CONSIDERATIONS
The rating is supported by Mitie’s (1) strong position in the UK's facilities management industry as a leading provider of technical, security, and cleaning services, (2) diversified customer base benefitting from long client contract relationships and (3) advanced technology platforms to enhance customer retention. The Coronavirus Disease (COVID-19) pandemic created both challenges and opportunities for Mitie which helped offset some of the declines in its business. Mitie also implemented cost control measures to mitigate the impact of the pandemic including deferring some planned capex and temporarily suspending dividend payments.
2021’s fiscal year-end results demonstrated Mitie's resilient financial performance and strong ability to manage through uncertainty. Revenues excluding revenue contribution from Interserve declined marginally in FY2021 by only 1.6% as additional revenue was generated from capitalising on new opportunities such as managing COVID-19 testing centres. Group revenues, however, increased by 17.7% from the previous year, reflecting the four months of revenue contribution from the integration of the Interserve acquired business which closed on 30 November 2020. Mitie’s FY2021 EBITDA was lower in FY2020 driven by the reduction in the higher margin revenue from the variable and project works due to the impact of COVID-19 on customer spending, as well as the lower margin revenues from the COVID-19 related business opportunities.
Mitie’s highly diversified mix of revenues by customer and sector provide a mitigant to cyclical variability. During FY 2021, the largest decline in growth came from Technical and Specialist services as many companies pulled back on their discretionary spend. This was somewhat offset by an overall net improvement in Business services which includes both security and cleaning. The rating is also supported by the forecast strong credit metrics which are consistent with a BBB rating. On the other hand, the rating is constrained by the relatively low margins for a services company and potential integration risk as a result of the Interserve acquisition completed on 30 November 2020.
Based on Mitie's current and forecast performance, DBRS Morningstar expects the Company's credit metrics to remain stable over the next 12 months with meaningful improvements occurring from FY 2023 onwards as the Company realises the benefit of its large investments in cost savings and efficiency improvement plans as well as integration cost synergies. DBRS Morningstar considers a rating upgrade to be unlikely in the short term as this would require a significant improvement in its key financial metrics on a sustained basis. On the other hand, DBRS Morningstar could take a negative rating action if Mitie’s financial metrics and/or its credit risk profile deteriorates beyond a range acceptable for the current ratings, including (1) its cash flow-to-debt ratio drops below 20% on a sustained basis and/or (2) if it fails to realise the cost savings from the investments in cost savings programmes and/or fails to deliver on its integration plans from the Interserve acquisition in the next 12 months resulting in a weaker than expected credit risk profile.
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 at https://www.dbrsmorningstar.com/research/373262.
All figures are in British pounds sterling unless otherwise noted.
The principal methodology is the Rating Companies in the Services Industry (29 January 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support (31 May 2021), and Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (03 February 2021).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include publicly available information from the rated entity’s website including 2020 Annual Report, 2020-2017 Audited Financial Statements, interim results, results presentations as well as Issuer provided information including (1) corporate presentation dated 19 March 2021; (2) Cash flow forecast model v21.2 dated 27 May 2021; (3) Draft financial results and other email clarifications). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/379923.
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Charles Halam-Andres, Managing Director
Initial Rating Date: 10 June 2021
Last Rating Date: N/A
DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960
Rating Companies in the Services Industry https://www.dbrsmorningstar.com/research/372947/rating-companies-in-the-services-industry (29 January 2021), DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support (31 May 2021), and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (3 February 2021).
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.