Local government cuts hit Mitie healthcare business

(Adds CEO comments, details)

By Li-mei Hoang

LONDON, Nov 23 (Reuters) - Cuts to British local government spending held back Mitie's first-half profit, the outsourced services provider said on Monday, as the company responded by closing a number of its healthcare activities.

Mitie, whose healthcare offering ranges from home care for the elderly to hospital cleaning, also warned that conditions would remain challenging for a further year before the division can return to profitability.

"We've seen some weakness in our healthcare division this year," Chief Executive Ruby McGregor-Smith told Reuters. "We expect that to continue for the next 12 months."

The healthcare business should "do very well" on new contract awards taking effect after that period, she said.

Pretax profit dropped 12 percent to 50.1 million pounds ($76 million) in the company's fiscal first half ended Sept. 30, with operating profit down 9.5 percent to 58.1 million. The healthcare division swung to a 2.1 million pound loss from a 4.5 million year-earlier profit.

Mitie shares fell 5.7 percent to 314 pence at 1118 GMT, one of the sharpest declines on the FTSE 250 index, paring the stock's 13 percent gain this year.

"The risks look to be on the downside," said Stephen Rawlinson, an analyst with brokerage Whitman Howard who maintained his "sell" rating on the shares.

Mitie entered the home care market three years ago with the acquisition of Enara, then Britain's fourth-largest home care provider. The business has since been hit by local authority spending cuts that have forced Mitie to exit a number of loss-making contracts.

Healthcare revenue fell 19 percent to 39 million pounds, accounting for 4 percent of the group total. Mitie offers services to more than a dozen industries such as leisure, education and transport, including security screening at London's Heathrow airport.

The spending cuts may yet play to Mitie's advantage as further public services are put out for tender, McGregor-Smith also said on Monday.

"The opportunities for outsourcing, which ultimately was always a response from clients to save money, will continue in the next five years," she said. ($1 = 0.6597 pounds) (Reporting by Li-mei Hoang, Editing by Paul Sandle and Laurence Frost)