Mears: so much more to come 

Under no-nonsense entrepreneur Bob Holt, who floated the business on AIM at 10p back in 1996, Mears has garnered a large City fan club thanks to its terrific track record. Yet, despite having created so much shareholder value already, there is much more to come from Mears, offering growth in the large, defensive social housing and care services markets where the risk of spending cuts is low.

Gloucester-headquartered and overseen by Holt, its near-legendary chairman and CEO, Mears has long been established as the leading social housing repair and maintenance provider, boasting strong ties with social housing landlords and local authorities and repairing and upgrading hundreds of thousands of UK homes.

Since its 2007 acquisition of Careforce, however, the company has also been building a presence in another market with compelling fundamentals, domiciliary care, where today it delivers more than 90,000 hours of care to 13,500 people or more every week.

In terms of financial track records, not many can compete with Mears, which in 2008 delivered its 13th consecutive year of double-digit sales growth, with the top line surging almost 40 per cent higher to more than £420 million. Profits reached record levels in the first year since Mears’s graduation from AIM to London’s Main Market.

Subsequent interims to June further underscored the group’s defensive credentials, with sales up nearly 15 per cent to £233 million, operating profits pushing 18 per cent higher to £10.8 million and the half-time payout upped by 20 per cent to 1.6p.

In its latest market missive, Mears flagged up positive trading trends since the half-year across all divisions and said it would hit analysts’ full-year estimates. And the good times look set to continue, with Mears having clinched new contracts worth in excess of £450 million since March, building its order book to £1.7 billion-plus and with its bid pipeline remaining plentiful.

Underpinning the Mears growth story is the fact that roughly 90 per cent of sales are generated in the highly defensive social housing and domiciliary care markets, where spend is mostly non-discretionary and bad debt next to non-existent. Despite the parlous state of the public sector purse, Mears insists that it has experienced no work delays from customers.

In the social housing sector, where Mears only bids for quality deals with sustainable margins, the long-term outlook is exceptionally upbeat.

Amid recent contracts mobilised by Mears is a substantial £200 million, ten-year contract with Brighton & Hove City Council, which begins in April, as well as a six-year repairs and maintenance partnership with Shoreline Housing Partnership valued at £50 million with the likelihood of an extension to £80 million-plus. With Sedgefield Borough Homes, the company has begun work on a five-year, £32 million ‘Decent Homes’ commission. Moreover, Mears sees a strong bid pipeline of £3.5 billion, underpinned by the trend towards larger contracts going to proven players able to handle their complexities.

A similar dynamic is occurring in the consolidating domiciliary care sector, where local authorities are looking to procure care services from fewer and larger providers of Mears’s ilk.

What is also interesting is the sharp convergence taking place between Mears’s social housing and care businesses – there are increasing opportunities to combine care and repair – which is likely to continue, no matter which political party forms the next government. There is a cross-party consensus to prioritise the agenda of housing in an ageing society, allowing people to remain secure and comfortable in their own homes as they grow older, irrespective of their financial circumstances.

Mears, whose mechanical and electrical (M&E) operation Haydon recently clinched a £9 million fit-out deal pertaining to the 2012 Olympics, is lowly geared and, since cost and cash are tightly managed, suitably positioned to pounce on acquisitive opportunities if and when it sees fit.

Mears has close to 100 per cent visibility of this year’s sales and more than 70 per cent of next year’s. Based on 2009 and 2010 estimates, the shares, down from their 12-month peak of £3, still offer superb value and progressive dividends.