Home Office deal boosts Mears' margin

Revenue at contractor Mears (MER) topped £1bn last year, with chief executive Lucas Critchley acknowledging “an increasing reliance” on its services by government, councils and housing associations.

A double-digit increase in revenue was largely driven by a 34 per cent uplift from management-led contracts, most notably provision of accommodation to the Home Office under an Asylum Accommodation and Support Contract. When it won this deal back in 2019, it had expected it to generate around £120mn a year, or 15 per cent of the group’s turnover. However, backlogs built up during Covid-19 have created “elevated volumes” and the contract provided 40 per cent of last year’s revenue. Although demand is expected to moderate over time, “this elevated position has continued into 2024”, the company said.

The higher volumes “have delivered additional economies of scale” that helped to push the group’s adjusted operating margin higher, by a full percentage point to 4.7 per cent.

Operating cash flow was also strong, increasing by £30mn to £145mn. So, even after spending £33mn buying back 11 per cent of its share capital, it finished the year with slightly higher adjusted net cash (excluding leases) of £109mn. A plan to return a further £20mn through buybacks will continue to support earnings per share growth, which broker Panmure Gordon forecasts will increase by 11 per cent. This will be driven entirely by the smaller share count, though, and the normalisation of revenues from the Home Office contract expected from next year means earnings in future years look weaker. With Mears' shares now trading above their five-year average at 12 times earnings (or 13 times based on 2025 forecasts), we err on the side of caution. Move to hold.

Last IC View: Buy, 265p, 3 Aug 23