Mears offers growth in care

It has been hard to miss the headlines about the perilous state of care in the UK, as pressures from central government cuts have led to falling spending on social care by local authorities, which represent Mears' clients. However, it looks like government may finally be beginning to grasp the nettle just as Mears is poised to see the benefit from restructuring work at its care division, which last year accounted for 16 per cent of group revenue and was responsible for a loss of £1.2m. Indeed, £2bn of extra care funding to 2020 was pledged for social care by the chancellor in March.

Meanwhile, Mears's attempt to revive the care division's fortunes have seen it acquire Care at Home from Care UK in 2015 and more recently withdraw from around one-fifth of its contracts to focus on higher-margin business. These actions may be starting to pay off - revenue for the division grew 5 per cent in 2016 and the company expects a return to profit this year. What's more, the ageing UK population means demand for care services will continue to rise and political pressure is likely to force government to step up to the funding stump.

The housing division, which provides maintenance, management and regeneration services, represents 84 per cent of revenue and faces less precarious prospects than care, given that funding is underpinned by the rent roll of social landlords. While margins dipped last year, this was down to costs associated with getting a high level of new contracts up and running following record order wins of £1bn in 2015. Profitability got back to more normal levels in the second half of 2016, though. Importantly, the company looks well placed to build on its record of steady growth given its high customer satisfaction levels and market-leading position. Housing should also benefit from a number of long-term demand drivers, including the need to increase the supply of affordable housing and increased regulation on private landlords.

The group has a visibility of 94 per cent of its revenues for the FY2017, which provides some reassurance. It is also expected to move back into a net cash position by the year-end after acquisitions contributed to push it to net debt to £12.4m at te end of 2016. Average net debt over the year was £85m.