DBRS Ratings Limited (DBRS Morningstar) confirmed the Issuer Rating on Mitie Treasury Management Ltd. (MTM or the Issuer) 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 five business units, including Business services, Technical services, Central Government & Defence (CG&D), Communities, and Specialist services. Mitie operates predominantly in the UK.
KEY RATING CONSIDERATIONS
The rating confirmation is supported by Mitie’s (1) strong position as the leading integrated facilities management company in the UK, (2) diversified customer base benefitting from long-term client relationships, and (3) advanced technology-led platforms to enhance margins and customer retention. The Coronavirus Disease (COVID-19) pandemic created both challenges and opportunities for Mitie. The Company benefitted from short-term rapid-response coronavirus-related contracts for the government, including testing centres and security for designated hotels. Mitie also implemented cost-control measures and temporarily suspended dividend payments. The Stable trend underscores DBRS Morningstar's expectation that the Company's key credit metrics will remain stable through 2023 to support the rating.
Fiscal-year (FY) 2022 was a record year for Mitie as net revenues grew by 56% year over year to GBP 3.9 billion (excluding the share of joint ventures and associates). The growth reflected the full-year contribution from the Interserve acquisition as well as strong performance from short-term coronavirus-related contracts, which contributed GBP 448 million to FY2022 revenues. Excluding both the Interserve revenues and the coronavirus-related contracts, Mitie's underlying revenues also grew by a reasonable 14% compared with 2021.
Mitie’s highly diversified mix of revenues by customer and sector with a high proportion of fixed to variable work contracts provides an effective mitigant to cyclical variability. The rating is also supported by the Company's strong credit metrics, which are consistent with a BBB rating. On the other hand, the rating is constrained by the relatively low margins.
Based on Mitie's current and forecast performance, DBRS Morningstar expects the Company's credit metrics to remain stable over the next 12 months, consistent with the current rating category (i.e., DBRS Morningstar-adjusted debt-to-EBITDA of less than 2.5 times (x) and DBRS Morningstar-adjusted cash-flow-to-debt of higher than 20%). DBRS Morningstar considers a rating upgrade to be unlikely in the short term given the size of the Company as this would require a sustained improvement in key credit metrics. 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 to or below 20% on a sustained basis and/or its debt-to-EBITDA ratio increases to above 2.5x, or (2) if the Company displays more aggressive strategies including pursuing opportunities outside its core expertise, financial policies, or debt funding over the next 12 months, resulting in a weaker-than-expected credit risk profile.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in British pounds sterling unless otherwise noted.
The principal methodology is the Rating Companies in the Services Industry (28 January 2022), 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/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support (4 April 2022), DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).
The primary sources of information used for this rating include publicly available information from Mitie’s website, including the 2022 Annual Report, 2022–17 Audited Financial Statements, interim results, results presentations as well as Issuer-provided information, including a corporate presentation dated 20 June 2022, the DBRS Cash Flow Model Summary sent on 26 June 2022, 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.
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 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://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/400493.
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Tom Currie, Managing Director
Initial Rating Date: 10 June 2021
Last Rating Date: 10 June 2021
DBRS Ratings Limited
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-- Rating Companies in the Services Industry (28 January 2022), https://www.dbrsmorningstar.com/research/391428/rating-companies-in-the-services-industry.
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (4 April 2022), https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.