The Mitie (LSE:MTO) share price is down 43% today after it diluted its stock with a rights issue. Mitie launched the £201m rights issue last month and announced it would be buying Interserve’s facilities management arm for £271m in cash and shares. Today the rights issue commenced with the admission of 805m new shares. The new shares will help to reduce the debt burden on the group.
Public meets private
Despite the share price fall, this move creates a more even balance in the group between the public and private sector. The business acquisition will increase Mitie’s exposure to the public sector. Services provided by the acquisition include building maintenance, fire safety, waste management, cleaning, catering, front-of-house and security. These will be delivered to a variety of clients including corporate offices, manufacturing plants, schools, hospitals, and defence estates. It should pave the way for Mitie to become a market leader in technical, security and cleaning services. Combining the two businesses will also help consolidate and reduce costs in areas such as IT and administration.
Value in the Mitie share price
I think this price plunge could be creating an opportunity to buy cheap shares in a quality company. The pandemic has created an increased need for hygiene vigilance in companies. Both the public and private sectors must be more thorough than ever in their cleaning practices. Outsourcing is the simplest solution for many such businesses.
Mitie and Interserve are among Britain’s biggest government contractors, and the merger is expected to generate combined revenue of £3.5bn. Mitie has a market capitalisation of £576m. Its earnings per share are 25p and its price-to-earnings ratio (P/E) is less than 2.
As the pandemic rages on, it is hampering business as usual, but as the group pays down debt and realigns itself as a major player in outsourced services, I think this stock could be a good addition to a long-term investor’s portfolio. The Mitie share price may be subject to continued volatility as the financial markets wrestle with economic uncertainty and geopolitical fallout. But, I think this company has a lot going for it and believe the share price will bounce back and thrive in the years to come.
Investing in healthcare
Another share I like the look of is medical equipment manufacturer Smith and Nephew (LSE:SN), which specialises in joint implants and surgical robotics. The lockdown has put a pause on many non-essential operations and caused a backlog to build.
Yet while leading an active lifestyle is positively encouraged nowadays, it can contribute to further wear and tear on joints. This leads to surgery. I think a surge in demand for knee and hip replacements will be seen in the coming years, driving up sales for Smith and Nephew.
Valued at £13.4bn, this FTSE 100 healthcare stock has a P/E of 28, its dividend yield is 1.8% and earnings per share are 54p.
Expensive maybe, with an unspectacular dividend yield. But Smith and nephew stands to benefit from the ageing population, increase in demand for joint replacements and advancements in modern surgery. Along with Mitie shares, I think Smith and Nephew is another good addition to a long-term investor’s portfolio.
The post The Mitie share price plunges 43% on rights issue! Why I think this is a bargain stock appeared first on The Motley Fool UK.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020