UPDATE 1-UK's Mitie sees tough year ahead, higher costs from turnaround plan

Fri, 16th Mar 2018 08:01

* Expects full-year revenue to grow 2-2.5 percent

* Expects year-end net debt up 50-70 mln stg

* Earnings for year to March 31 due June 7

* Shares touch multi-year lows(Adds new estimates on savings, details on profit warnings,updates dateline)

March 19 (Reuters) - British outsourcing company Mitie Groupsaid on Friday it expected annual costs associated withits turnaround programme to be higher than previously estimatedand added that the year ahead would remain "challenging".

Shares in Mitie fell as much as 8.3 percent to 147.9 penceon Friday, hitting their lowest level in nearly 13 years.

Mitie, which took its property management unit off themarket in December after putting it up for sale, said on aconference call with analysts that the unit had not performed aswell as it had hoped.

The company raised its estimate for costs related to itsturnaround - dubbed Project Helix - to about 35 million pounds($48.83 million) for the year to March 31 from a previousestimate of 24 million. The project would nowdeliver savings of around 50 million pounds by March 2020, uparound 10 percent from the previous guidance.

Mitie shares closed down 3 percent on Friday.

The provider of pest control, cleaning, security andhealthcare services is restructuring after a string of profitwarnings, which it has blamed on rising costs and uncertaintyrelating to a number of factors including lower UK growth rates,public sector budget constraints and Britain's planned exit fromthe European Union.

"Whilst management is clearly trying to do the right things..., there appears to be limited tailwinds from its end marketsand, in our view, this turnaround could be more protracted thanoriginally thought," RBC Capital Markets said in a note toclients.

Mitie also said on Friday that it expected to report a riseof 2-2.5 percent in full-year revenue to 2.2 billion pounds($3.07 billion).

The company said organic growth in the year had been hurt byweak performance in its property management unit and contractlosses in its professional services unit.

Like peers such as Capita and now-bankrupt Carillion, Mitie has been hit by rising UK labour costs.

"The liquidation of Carillion has raised some fundamentalquestions about the outsourcing industry," Chief ExecutiveOfficer Phil Bentley said.

Carillion collapsed in January when its banks pulled theplug, after costly contract delays and a slump in new businessleft it swamped by debt and pensions liabilities.

Mitie, which is scheduled to report its annual earnings onJune 7, said it expects its financial year-end net debt to haverisen by 50 million to 70 million pounds. It said it expects tocontinue to operate within its banking covenants.

Britain's Financial Reporting Council (FRC) has launched ainvestigation into how Mitie's 2015-16 financial statements wereprepared and approved, Mitie said in November.

($1 = 0.7163 pounds)(Reporting by Radhika Rukmangadhan in Bengaluru; editing byGopakumar Warrier/Jason Neely/Alexander Smith)