Mears posts record results amid asylum criticism

At first glance, it is easy to see why Mears’ (MER) share price rose 6 per cent on the morning of its results for the last calendar year. The accommodation services provider’s pre-tax profit more than doubled from £16.3mn to £34.9mn thanks to its £960mn record revenue – beyond consensus forecasts – offsetting a 9.46 per cent increase in the cost of sales.

However, those numbers need context. The company said the stellar figures were “underpinned by the increased volumes experienced within the Asylum Accommodation and Support Contract (AASC)”. It added that “except for AASC, revenues have been relatively consistent across the remaining contract estate, with a small reduction in our traditional repair activities”. 

In other words, without the AASC, revenue would not have been as impressive. Mears says that it has so far received more than double the £120mn revenue it planned for from the contract as the government has become ever more dependent on Mears’ services due to an influx in asylum claims.

This is worth bearing in mind considering the chorus of criticism the company has received from charities and politicians who say that the accommodation and services provided by Mears for asylum seekers are subpar. While some of these criticisms date back a few years, the number of concerns raised last year as the living conditions of asylum seekers has become front-page news is worth investor consideration. 

Mears has long defended itself against these claims, stating in its results that while the continued use of hotel accommodation is “not the preferred solution”, it is “working hard to increase the number of residential properties which we can use”. It adds that it is “unequivocally focused on being the leader in the UK in providing high-quality housing services to the public sector”.

What’s more, even with the criticism, Mears’ AASC revenue remains secured with the government giving no indication that it wants to renege on the contract with Mears to provide the services until 2029. 

Gearing is also lower than it has been in recent years thanks to a bump in net cash, and this cash flow has helped increase dividends by 31 per cent on last year. These shareholder payments are covered by earnings 2.33 times and Mears said it would look to reduce this to two times earnings – a still conservative approach which underlines its confidence in future cash generation and suggests further dividend growth over the coming years. Shares are also well priced at nine times earnings.

As such, we reiterate our buy call, but note that the service Mears provides has been called into question. Buy.

Last IC View: Buy, 204p, 4 August 2022