Mears to benefit from government housing focus

Housing maintenance service provider Mears Group (MER) offers a good way to get exposure to the government’s upcoming housing investment plan. Its trading has bounced back strongly in the first half of the year after sales were hit last year by maintenance work being put on hold due to the pandemic. 

As a result, Mears swung to an adjusted profit before tax of £11.1m from a £8.1m loss last year and boosted full-year revenue guidance to around £840m, up from a range £770m - £820m. Its strong cash and working capital management, thanks to the recent disposal of capital intensive businesses Terraquest and Dom Care, has enabled it to lower its guidance for full year average net debt down to £25m from £50m.

The company has cited the government’s planned increased investment in affordable housing and its commitment to raising the carbon efficiency as “external drivers” for the business. The order book is yet to benefit from this shift in government policy, standing at £2.5bn compared to £2.6bn at the end of the last year, however, it should generate some uplift in 2022.

House broker Peel Hunt is expecting £25m of adjusted profit before tax for the full-year 2021 (in line with Mears’ guidance) and is estimating this to rise to £29.5m by the end of 2022.

Given its low capital model and position to benefit from the much-needed investment in affordable housing, the 10 times forward earnings it is currently trading at looks cheap. Buy.

Last IC View: Sell, 126p, 18 August 2020