Within the FTSE 250 index, Mitie (LSE: MTO) has been staging a turnaround since the lows of the pandemic.

Today’s (23 July) first-quarter trading update suggests there may be more to come from the facilities management and maintenance company.

Winning and acquiring business

In the three months to 30 June, overall revenue grew by 10.5% year on year. The trading momentum arose because of “significant” contract wins and renewals in both the public and private sectors. But on top of that, last year’s acquisitions added to the top line, and there were also increases in variable fee pricing.

Chief executive Phil Bentley said the company intends to invest this year in its Facilities Transformation three-year plan. The directors expect it to “accelerate growth and deliver superior financial returns”.

Part of the plan will involve adding more key accounts, projects and “infill” acquisitions, Bentley said.

In the meantime, Mitie has “made a good start” with profit margin enhancement initiatives. There will likely be around £20m of cost savings in the current trading year, and the directors think the operating margin of the business will increase over the medium term.  

But the £50m share buyback programme that started in April will neutralise some of those potential gains to the business. On top of that, the company just reported that net debt rose to £182m compared to just £81m on 31 March 2024.

I’d be happier to see net debt falling. This is a business with a lot of cyclicality in its operations and that’s an ongoing risk for shareholders. I reckon the business ‘should’ be building up its cash reserves during the good times to help see it through the almost-inevitable bad times.

Aiming for higher returns

Overall, though, debt levels are modest. But the management of borrowings is a potential risk area for shareholders to keep an eye on going forward. After all, the company is acquisitive as well as cyclical, so there will likely be big demands on future cash flows.

In one example, Mitie has committed to acquire ESM Power for £5.5m and the deal is set to complete on 31 July. It’s a high voltage electrical engineering business. The directors believe the move will enhance Mitie’s expertise in the “growing” high-voltage power connections market.

The ongoing aim is to “target higher growth, higher margin” acquisitions to increase the capabilities of the business in the areas of buildings infrastructure, decarbonisation, fire, and security.

Meanwhile, City analysts expect normalised full-year earnings to decline by around 24% in the current trading year before rebounding in the year to March 2026. Patchy annual earnings are a multi-year feature of the business and another indicator of its cyclicality.

With the share price near 121p, the forward-looking price-to-earnings multiple for the current year is around 11 falling to just under 10 the year after.

That’s not an excessive valuation and the business might have been overlooked by some investors. So, on balance and despite the risks, I’m inclined to research further.

The business looks attractive to me because of its ongoing cyclical recovery and longer-term growth prospects as it hopefully continues to tilt towards higher-return operations.