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This penny stock is up 15% in 1 month. Should I buy?

·3-min read
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Mitie (LSE: MTO) is a penny stock that has been rising. During the last month the shares have risen 15% and they’re up more than 85% during the last year.

Of course, past performance isn’t an indication of future returns. But I commented on Mitie being a penny stock that I’d buy in June. And I still hold this view. The company reported its full-year results last week. And the numbers look promising.

The results

The 2021 financial year marked the end of Mitie’s four-year transformation. And the company showed resilience through the pandemic. Revenue increased by 19% to £2.6bn. This included a four-month contribution from its Interserve acquisition.

But operating profits fell. The company said that the additional profit from contract wins, inclusion of Interserve and associated £6.2m of synergies was “more than offset by the impact of Covid on trading, the ending of certain profitable contracts in the prior year and the reinstatement of incentives and share based payments (which were waived last year to preserve our financial strength)”.

Order book

Yet I like that Mitie’s order book looks strong. As of the end of March, it stood at £7.2bn, which included £3.2bn from Interserve. This offers revenue stability and transparency, which is something I look for when analysing a company.

What is encouraging is that the FTSE 250 firm has managed to either win or renew contracts worth £1.3bn. To me, this highlights that Mitie’s clients think it’s doing a good job, otherwise they wouldn’t have extended their contracts. It also reconfirms the company’s market position and makes it stand out from its competitors.

Mitie acquired Interserve in November last year. Most of the acquisition’s order book has contracts that average 15 years in length. What I also like is how Mitie has managed to renew or extend all of Interserve’s major contracts that came up for renewal in the four-month period under ownership. This should prove to be positive for the penny stock in the long term.

Net debt

Mitie is also improving its financial position. The net debt position at the year-end stood at £86.7m compared to the previous year’s £153m. Clearly, a rights issue and refinancing of its credit facility have helped.

But it’s good to see that the company’s liabilities are falling and heading in the right direction. I think the shares could rise further on the back on of an improving balance sheet.

Risks

It’s clear that Mitie was hit by Covid-19. While restrictions are somewhat easing, I’m not suggesting the pandemic is completely over. The coronavirus crisis could continue to impact profitability just as it did in its 2021 financial year. Another period of low profits may prove to be negative for the shares.

But I think things look promising for this penny stock. It’s winning or renewing contracts while the Interserve acquisition seems to be integrating well and is starting to pay off. The four-year transformation plan has come to an end, so investors should start to see the benefits. I’d buy Mitie shares today.

The post This penny stock is up 15% in 1 month. Should I buy? appeared first on The Motley Fool UK.

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Nadia Yaqub 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.

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