Mears puts its own house in order

The company then had to contend with the loss of some revenues as many housing association clients postponed non-urgent maintenance work once the pandemic hit. The past 12 months has seen progress on many different fronts.

One of the most important has been the strengthening of its balance sheet. A move to a more capital-light business model has involved the disposal of some businesses and a gradual winding down of its development arm. Its long-term liabilities have almost halved to £203mn – from £391mn at the end of 2019. Moreover, 87 per cent of this is made up of leases held to deliver 10,000 homes via government contracts to key workers and vulnerable clients. If leases are stripped out, the company has net cash of £54.6mn, compared to net debt of £51.1mn in 2019.

Sales of subsidiaries – most notably the TerraQuest business for up to £72mn – have done much of the heavy lifting in terms of debt reduction, but the growth in profitability last year helped. Mears’ adjusted operating profit of £29.6mn was more heavily weighted to the second half of the year, when its margin grew by 60 basis points to 3.7 per cent.

The company’s management-led contracts arm, which provides housing for government clients and generates 35 per cent of revenues, saw sales grow 22 per cent as it delivered more homes through an Asylum Accommodation and Support Contract for the Home Office. Revenue edged up marginally at the maintenance-led arm, which generates 62 per cent of revenue.

The company expects the latter, which works on about 10 per cent of the UK’s social housing stock, to improve this year as maintenance work returns to normal and it picks up more housing decarbonisation work from social landlords. Money for this has been thin on the ground so far, but £800mn is set to be released through the Social Housing Decarbonisation Fund next month.

Long-term investors in Mears have had it tough – over a five-year period the shares have lost almost 60 per cent of their value. However, the reintroduction of a dividend – and the pledge to progressively grow it – offers some hope.

The shares also remain 6 per cent ahead of where they were when we upgraded our recommendation to a buy six months ago, and at a valuation of 10 times house broker Peel Hunt’s earnings forecast of 20p per share they remain as affordable as the homes the company manages. Buy.

Last IC View: Buy, 13 Aug 2021