Contractors Must Bolster Balance Sheets to Absorb Carillion-Style “Knocks”, Says Mitie Chief

    By Philafrenzy (Own work) [CC BY-SA 4.0] via Wikimedia Commons

    The boss of Mitie, the support services giant, has said that the beleaguered contracting sector of Britain must shore up their balance sheets in order to weather a Carillion-style storm.

    The newest contractor to suffer at the hands of investors was Capita. Last week, shares in the firm almost halved following its revelation of an operational turnaround and its warning on profits.

    And the likes of Mitie and Interserve have been a victim of volatile trading amid heightening fears that they could be in line for the same kind of mammoth contract write-downs that placed Carillion on the path to failure last January.

    Mitie employs more than 60,000 people worldwide. It has seen the stock market valuation of the company lose almost half of its value since July of 2017.

    The chief executive of Mitie, Phil Bentley, informed reporters that Carillion was operating with margins that are wafer-thin, exposing the company to “cost overrun risk.”

    “The balance sheet ultimately that could not take the knocks,” said Bentley.

    “Most CEOs [in the contracting sector] are now saying: ‘We’ve got to have less leverage in our balance sheet. We have more headroom for our equity base to take the knocks.’”

    The catalyst to the malaise of Mitie was a big write-down on a contract that saw the restatement of its profits from £129m to a loss amounting to £6m.

    Bentley said that the company had stopped the “interpretations” of rules in accounting that allowed the profits to be decoupled from the cash flow and was constantly reviewing the contracts with the help of some forensic accountants.

    Meanwhile, the chief of Mitie dismissed the criticism of the government of the United Kingdom not stepping in to bail out Carillion.

    Bentley stated: “As far as I am aware, no-one put a gun to the head of Carillion and said sign here. I am a little sceptical about the argument that the government are to blame here. They are looking for value for the taxpayer.”

    Bentley added that had some of the major projects of Carillion been in the public sector, the taxpayer would have had to pick up the bill for over-runs that amounted to hundreds of millions of pounds.

    “[The public] should be delighted that the bankers and equity holders of Carillion paid for the over-run, not the taxpayer.”

    It was insisted by Bentley that the business of Mitie fundamentally differs from its rivals because it is paid on an input instead of an output measure. For example, the contracts of the company are usually based on delivering a specific number of working hours (servicing or cleaning), instead of guaranteeing delivery of an overall service or project.