Mears grows from others woes

Mears (MER) is busy getting on with winning business in what has become an increasingly difficult social housing maintenance market, since the £22bn government-sponsored Decent Homes Programme came to an end. Profit margins have always been tight in this sector, but they are getting tighter and some competitors have been cutting a few too many corners. Accordingly, Mears has benefited by winning some big contracts - with Southwark Council and Notting Hill Housing Trust - due to the early termination of existing contracts.

Indeed, such tough conditions led Morrison Facilities Services to suffer a sharp deterioration in trading - Mears is now buying that struggling rival for £24m. And Mears' trading update this month revealed a robust trading picture in its social housing business - that unit has secured new contracts worth £107m, taking the order intake for the year to £142m. The social care business is also expanding, helped by its new partnership model with local councils - it recently won a contract with Cambridgeshire County Council. Divisional order intake for the current year now stands at £58m, with a contract win rate of 60 per cent. Overall, the group now has a £2.6bn order book with secured revenues that represent 99 per cent of 2012's current consensus forecast revenues, and 86 per cent for 2013.

N+1 Singer says...

Buy. The performance of the domiciliary care division is encouraging and the social housing side is performing well - a heavy period of mobilisation appears to have been dealt with successfully, which should underpin a second-half margin improvement. A sizeable competitor, Morrison, has been acquired, too and - while currently lossmaking - we back management's ability to turn it round. That deal has the potential, therefore, to deliver significant medium-term earnings growth. We downgrade current-year forecasts for adjusted pre-tax profits to £31.3m, giving 25.8p, but upgrade 2013's forecasts by 4 per cent to £36.7m and 29.6p, respectively. Our price target stands at 390p.

Espirito Santo says...

Neutral. We view the Morrison acquisition as a positive step forward in social housing, both increasing scale and removing a potentially disruptive competitor. Indeed, the acquisition represents another sensible opportunistic purchase on the part of Mears. Certainly, Mears' valuation on conventional metrics remains unchallenging. But lower free cash generation relative to peers, together with continued slow delivery in domiciliary care, still limits our current enthusiasm for the shares. We maintain a neutral rating, but increase our cash-derived fair value from 260p to 285p. Expect EPS for 2012 of 26.9p (from 26 in 2011) and a 7.7p dividend.