More trouble at Mitie

I got an unusual telephone call from a longstanding contact in the market yesterday evening. He drew my attention to the piece that now follows. It was written by Robert Lea in yesterday’s Times:

“These odd outsourcing companies present an interesting post-Brexit conundrum. But there is nothing so strange about these businesses as their accounting. Now Baroness McGregor-Smith has been persuaded it is in Mitie’s best interests that she goes, her successor as chief executive will want to sort out its incomprehensible accounting.

When Mitie wins contracts, it books the cost of transitioning the work as an asset on its balance sheet. In the initial, less profitable years of a contract, it books earnings at the average expected rate over the life of the contract rather than profits actually counted in cash. All told, Mitie may have as much as £500 million of accounting “funnies”, as they are known in the trade, in its accounts.” 


I am uncertain as to the meaning of ‘transitioning’ in this context. But my informant points out that it means capitalising just about anything which would otherwise normally be written off to P&L and, in this case, the capitalisation comes to £500m (somebody has given Mr Lea a steer).

If so, this is a walloping hole in Mitie‘s (LON:MTO) balance sheet and, once revealed under IFRS 15 (this takes effect imminently since only a foolish virgin will wait until the 1st January 2018 kick off date), the market might just mark MTO’s share price down a long long way – perhaps comfortably below 100p.

After all, MTO on its current accounting gets to net assets of £225m. Knock off £500m and things do not look too good. Besides, losses, however computed, may be continuing as well. Phil will have to change his surname from Bentley to Nissan-Micra which at least has the merit to some eyes of being double-barrelled.