Share tips: A well-looked after care provider

With local councils looking to cut costs, and a steadily ageing population, now is a great time to jump onboard with this social housing and care provider, says Paul Hill.

Social housing and domiciliary care provider Mears Group reported a hefty £2.7bn order book, along with a £3bn order pipeline, in a trading statement last week. Of this sum, £1.6bn relates to contract awards within the next 12 months. This is equivalent to 95% of 2011 revenues and reflects the importance of its repairs arm (71% of sales). It maintains a UK portfolio of 500,000 houses owned by local authorities and housing associations. Work is carried out under long-term agreements to take care of all the little niggles in council rented properties. These include blocked drains, broken windows, detached tiles and broken-down boilers.

Performance in its domiciliary care division is also solid. It employs 7,000 carers, often women working flexible hours, who call on 20,000 residents requiring support. Clients are typically old and, in some cases, infirm. Mears' staff ensure that they are well fed and looked after. The firm competes with the likes of Allied Healthcare, Care UK, and Nestor Healthcare. Within the social housing sector its main rivals are Inspace, Kier, Lovells and Mitie.

In the first eight months of the year the group secured 47% and 62% by value (in housing and care respectively) of all the contracts tendered, amounting to a total order intake of £463m. Mears is also launching new services. Via its partnership with Tunstall it has already snaffled a blue-ribbon deal with Birmingham Council for the rollout of telecare/medicine across the city. In addition, it has begun selling an internally developed IT platform aimed at other care providers. Chief executive David Miles reckons this could transform administrative standards in the sector.

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Mears (LSE: MER), rated a BUY by Arbuthnot Securities


So why did the shares fall 13% after the trading update? The government recently announced steep cuts to its electricity feed-in tariffs, reducing them from 43p per KWH to 16.8p for multiple roof installations. This has made Mear's start-up solar installation unit (in partnership with British Gas) unviable. The resulting hit to operating profits was £2.8m for this year, along with another £2m in one-off charges. Miles stated: "While I still consider the group to be extremely well placed to benefit from the opportunities relating to fuel poverty, it is unfortunate that we have wasted time and resources in this area over the past six months." He demonstrated his confidence by buying 10,000 shares at 215p each.

Joint house broker Investec is now projecting 2011 turnover and underlying EPS of £585m and 23.8p respectively, rising to £634m and 28.3p in 2012. The shares thus trade on paltry price/earnings (p/e) ratios of less than nine, despite a strong balance sheet and a 3.1% dividend yield. I value the shares on a 13 times p/e multiple, or somewhere north of 300p.

Challenges include contract issues, delays and bureaucracy due to working with government bodies. But with local councils seeking to cut costs via outsourcers and the Bank of England aiming to stimulate the economy, I still think this is a good moment to jump on board. Investment bank Arbuthnot has a target price of 275p.

Rating: BUY at 210p (market capitalisation £185m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See, or phone 020-7633 3634 for more.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.