Mears looking at a potentially lucrative pipeline

Management at Mears (MER) revealed that annual revenues are now expected to be "materially ahead" of current market consensus following a pleasing first-half performance. The shares were marked up on results day after the company, a provider of maintenance and management services to the UK housing sector, lifted its half-year dividend by 30 per cent to 3.25p.

The win-rate of tenders came in at 40 per cent, contributing £165mn to the current order book of £2.3bn. The most lucrative contracts secured through the period were with Tower Hamlets Homes and the London Borough of Havering, worth £125mn in aggregate. The bid pipeline for contracts to be awarded in 2023 stands at approximately £750mn, although that excludes a 12-year programme of works from North Lanarkshire Housing, potentially worth £1.8bn.

Cost inflation is the central theme in the economy, but it appears as if contractual indexation mechanisms put in place by Mears have supported profitability, with the gross margin up 20 basis points to 20.3 per cent and with the improvement also visible at the operating level. And while receivables constitute approximately a quarter of the group’s total asset base, that is in keeping with historical norms.  

The pandemic casts a long shadow, as planned maintenance activities (as opposed to day-to-day demands) remain below pre-pandemic levels and there are few signs that this is about to turn around overnight. Long-term prospects are tied-up with the “structural challenge of the UK's ageing social and affordable housing stock”, but a tightening regulatory framework linked to environmental standards should also support activity going forward. For now, management is guiding for adjusted pre-tax profit to be at least £32m. With the shares trading at 10 times consensus earnings and on a prospective dividend yield of 4.4 per cent, we reiterate our buy call. Buy.

Last IC View: Buy, 201p, 31 Mar 2022