Mitie Advances on Merrill Lynch Two-Step Upgrade: London Mover

Mitie Group Plc, the facilities services company that gets two-fifths of its business from the U.K. government, had its biggest two-day gain in more than a year after Bank of America Merrill Lynch raised its rating by two grades.

The shares rose 1.9 percent to 264 pence in London, taking the two-day gain to 4.8 percent, the biggest advance in as many days since April 2012. The volume of shares traded was 21 percent more than the three-month daily average.

The company “has addressed underperforming businesses,” Andrew Ripper and Andy Murphy, analysts at BofA Merrill Lynch who upgraded the stock two steps to buy from underperform, said in a note to clients today. “The group has some balance-sheet flexibility, should benefit from a gently improving U.K. economy and be capable of mid-single digit growth.”

Mitie’s stock has underperformed the U.K. facilities management sector by about 30 percent in the past year, the analysts said. Serco Group Plc, for example, has risen about 21 percent in the last 12 months, compared with Mitie’s decline of 3.7 percent through yesterday.

Mitie has a record of building market share in a large and fragmented U.K. facilities management market, and is supported by procurement trends that result in a larger number of services being awarded to a smaller number of suppliers, the analysts said.

Supplying Guards

Babcock International Group Plc, Serco, Capita Plc, Mitie and G4S Plc get about 8 billion pounds ($12 billion) of revenue a year from U.K. government contracts, the analysts said.

Mitie, whose contracts include supplying guards for the law courts in England and Wales, gets more than 800 million pounds from the government out of total revenue of 2.1 billion pounds, they said. The company has no material risk of losing contract renewal bids in the fiscal year ending March 31, the analysts said.

The analysts cut their estimates for Mitie’s full-year earnings for 2014 and 2015 to account for changes to pension accounting rules and charges for share plans. They raised their price target for the stock to 290 pence from 275 pence.

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