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Mears shifts focus to balance sheet

The group missed its target for daily average net debt in 2018
March 19, 2019

Investors are losing patience with Mears (MER). Just days after fellow outsourcer Interserve entered administration, investors sent the housing services group's share price down 8 per cent when it missed expectations on revenues, profits and net debt. In response, management is making balance sheet strength its focal point, through a combination of debt reduction, rejigged capital allocation and improved cash generation. The daily average net debt was £113m in the year (excluding the property acquisition facility), or 2.6 times cash profits.

IC TIP: Hold at 265p

Management has been meeting with major shareholders and, despite protestations that “the negativity surrounding outsourcing has been unhelpful”, is looking to make improvements. The group will be stepping back from its capital-intensive development activities, which generated a return on working capital employed (trade receivables less trade payables) of just 7 per cent in 2018, well adrift of the rates for maintenance and management activities. Chief executive David Miles said he did not expect to see the group making any acquisitions or entering any new areas of work soon.

House broker Peel Hunt reduced its forecasts for adjusted 2019 pre-tax profit to £40.5m (from £50.8m) to reflect the shift away from development projects. It now expects adjusted EPS of 29.2p, broadly flat on 2018.

MEARS (MER)   
ORD PRICE:265pMARKET VALUE:£293m
TOUCH:265-269p12-MONTH HIGH:400pLOW: 245p
DIVIDEND YIELD:4.7%PE RATIO:11
NET ASSET VALUE:191p*NET DEBT:31%
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201483929.725.010.0
201588125.920.311.0
201694029.423.511.7
201790026.520.312.0
201887028.423.112.4
% change-3+7+14+3
Ex-div:13 Jun   
Payment:4 Jul   
*Includes intangible assets of £229m, or 207p a share