Mears

LONG-TERM BUY

16/08/2011 Miles Nolan

Leading social housing to domiciliary care group Mears (MER) has reported a record set of interim results, driven by strong nationwide demand for its services.

In the six months to June, sales jumped 16% to £292.6m as pre-tax profits leapt 55% to £10.9m. Shareholders are also being rewarded with a 13% hike in the dividend to 2.15p. Mears is witnessing 'unprecedented levels of opportunity in the public sector' and boasts of 97% visibility for 2011 consensus forecasts, and 85% for 2012.

Fully listed Mears has a chunky £2.7bn order book and secured over £300m of new work during the period. In social housing, Mears has a potential pipeline of new business worth £3bn, with just over half of this due to be tendered in the next 12 months.

It has secured a raft of work following the demise of rival Connaught, including a ten-year contract with Barnet Homes and work with Notting Hill Housing. Mears has also picked up the social housing business assets of the Bristol division of the collapsed Rok.

In the care arm, sales increased 8% to £51.7m with a maintained operating margin of 7.5%. The trend by local authorities to rationalise suppliers continues, and earlier this month Mears continued its expansion with the £7m acquisition of Choices Care. The planned novation of 12 contracts will take Mears more into higher-margin acuity care, and is expected to be earnings enhancing next year.

A partnership with British Gas and Cross Key Homes is expected to establish the largest photovoltaic solar panel scheme in the UK – the first step will be 3,500 homes in Peterborough. Mears is undertaking a large proportion of the installations as well as work such as electrical components and scaffolding.

Broker Collins Stewart expects 2011 pre-tax profits of £34.3m and EPS of 27.7p. We last placed a buy recommendation on the shares in March at 280p, and with the current price at 275p we remain positive. Mears is operating in a largely non-discretionary area of the market and, in addition, with a huge level of visibility there is added comfort.