Mears is ripe for a rebound

Mears generates about 85 per cent of its sales from housing services, such as repairs, maintenance, estate management and emergency accommodation. The rest is made up by the care business, which provides care at the homes of service users, including live-in care and independent living services.

Both divisions are well placed to capitalise on long-term population trends. The affordable housing shortage is forcing councils to spend more than £2m each day on temporary accommodation – which Mears helps provide – and crank up the building of new houses while also improving the existing stock. The number of households in the UK is expected to pass 30.5m by 2027, from 27.2m in 2017, fuelling further need for Mears’ services. Meanwhile, demographics are shifting towards an older population with the number of over 65's is expected to increase from 18.0 per cent to 23.9 per cent of the population between 2016 and 2036, increasing demand for care services long into the future.

However, the group has been facing more immediate challenges. Following the fire at Grenfell Tower in June last year, the group twice revised down its revenue expectations for the housing division as local authorities undertook reviews and put discretionary spending decisions on hold. However, with the reviews now complete, and Mears well placed to benefit from an increased focus on health and safety, there are reasons for guarded optimism. 

Investors can also hope for a pick-up in housing contract wins this year. In 2017, not only did Mears bid for less work than usual, at £940m, but it also won far less work than normal, with a win-rate of 16 per cent compared with a target level of 33 per cent, which it normally meets or exceeds. All in all, the order book ended 2017 at £2.6bn, from £3.1bn in 2016. By contrast, this year Mears expects to bid for over £2bn of work (broker Liberum estimates £2.8bn) with management maintaining the historic win-rate target.

Meanwhile, after several years wracked by government cuts to social care, the care business has been restructured and has exited problem contracts representing 27 per cent of the division's revenues. This helped return the division to profit in the second half of 2017 and this year's margin targets have recently been nudged upwards. The division should also benefit from the government's pledge of an additional £2bn in funding for care between now and 2020.