Mears' management-led volumes stay high

Mears’ (MER) government-backed housing of asylum seekers continues to drive revenue growth. While the board reiterated that it expects demand in this area to ease, it said that “volumes will remain high over the shorter term”. This was evident in the first half, with the company's asylum accommodation and support contract (AASC) helping to push management-led revenues up by a quarter to £252mn. The performance backed up a double-digit increase in the dividend. 

The company spent £10.2mn in the half to “fund property acquisitions to support the urgent requirement for additional properties” within the AASC and said that figure would probably double in the second half. A reliance on hotels to house asylum seekers isn’t sustainable. Investors should be aware that Mears has come in for criticism from charities for the standard of accommodation it has provided to those seeking refuge here.  

Maintenance-led revenues were flat at £272mn, although the company expects a return to organic growth. Coming to the rescue is a significant opportunity in North Lanarkshire, with Mears the sole remaining bidder on a contract worth £1.5bn over 12 years. 

The gross margin fell by 70 basis points to 19.7 per cent as cost of sales rose by 9 per cent, although progress was made with a 10 basis point increase in the operating margin, and the company pointed to signs of easing inflation. 

Mears now expects full-year revenues of at least £1bn and an adjusted profit before tax of at least £40mn, figures ahead of the analyst consensus. A 4 per cent dividend yield is attractive, and while the shares trade hands at a consensus 12 times forward earnings, according to FactSet, a premium to the five-year average, the rating isn’t demanding given the performance and outlook. Buy.  

Last IC View: Buy, 221p, 28 Apr 2023