.

Mears Group is an Aim-listed small cap. They are in the unloved service sector - profitable and paying dividends - and mainly specialise in the maintenance of local authority housing.

http://www.mearsgroup.co.uk/Services/services.htm

Trading update (January 27, 2003)

The Board of Mears is pleased to announce that trading for the year ended 31
December 2002 is expected to be ahead of market expectations.

This is a result of a continuation of increased turnover, improved operating
margins and controlled costs.

The current year has started well with a strong order book and a sound balance
sheet which form a basis for expected further improvements and expansion in the
support services and related markets.

The full year results will be announced on 2 April 2003.

Commenting on the results Bob Holt, Chairman said: 'The Group is better placed
to maximise the market opportunities than at any time in its history. I am
delighted with our progress to date as we continue to build a strong brand,
profitably in a growing sector. The support services sector has seen a
downgrading as a result of problems experienced by a small number of companies.

We have not been affected by the problems and I believe that Mears will benefit
in the coming months as the investment community at large seek out companies
with quality, cash backed earnings.

The Board of Mears is confident for the year to come.'

http://www.uk-wire.co.uk/cgi-bin/articles/200301270700025902G.html

This follows last week's comment from WestLB Panmure - who started coverage of the stock with a 'buy' stance and 78 pence price target, citing an improved outlook for the firm and its strong cash position. WestLB said the visibility of earnings at Mears, which provides a range of maintenance services in the social housing sector, has improved, with its forward order book now standing at 240m and 80% of 2003 forecast revenues now secured. It also noted that there is an estimated 19 bln stg backlog of maintenance work in the social housing sector, on top of the 4 bln stg annual maintenance spend. Government targets, which local authorities are required to meet, should ensure that an increasing share of this work goes to private sector operators, like Mears, the broker pointed out. Although the opportunities in this market are likely to attract new entrants, WestLB argues that the size of the market and Mears' track record should enable the firm to maintain margins. Furthermore, it believes its strong cash generation leaves the group well positioned to grow either organically or via acquisition over the medium-term.

The last time I had an update from Mears (apart from RNS announcements) was in October, when the CEO Bob Holt gave a presentation at an investment exhibition and I also spoke to both him and some of his colleagues at length on their stand.

The strategy remains the same - to develop long term contracts in the council housing maintenance area. But I learned that Bob Holt has changed his policy on payment, and now gets all his overheads paid up front and negotiates fixed net margins for the duration of a contract. In October, he was taking orders for individual pieces of work (from replacing a door or fixing a leaking radiator to refitting a new kitchen or bathroom) at a rate of 2,500 a day..... and he felt that the current forward order book of some 260+m is actually worth nearer 320m as there is both more work coming in within the context of the existing contracts and there is also the strong likelihood of some of those contracts being extended.

Bob Holt is also very tight on work controls. Each of his men is issued with 5 work dockets (i.e. the work orders for each day), and no one gets another 5 until the first 5 have been completed and returned satisfactorily. Apparently it is commonplace in the sector for workmen to "lose" the last docket... meaning that only 80% of the work is actually done and therefore paid for by the customer, which hits margins and creates something referred to as "the hockey stick effect" in terms of cash flow (although I don't really understand the reference) - but I gather that this is a problem that other companies in this sector suffer from.

He is still keen on acquisitions - but is not in a rush. He had very recently put in a bid for one un-named company when I spoke to him, after talking to them on and off for several years - but they had turned him down for the time being.

Since then, we have had the announcement of the acquisition of M+T Group which I believe is the un-named company he referred to in October - the terms negotiated seem good value, they have had a working relationship (as subcontractors) for years and I believe the acquisition will be revenue enhancing in the 2003 financial year.

http://www.uk-wire.co.uk/cgi-bin/articles/200212111200029546E.html

Obviously, as the acquisition was announced only days before the end of the 2002 financial year (to end December) there will be no immediate impact when the prelims are released in late March/early April - although I would expect an update on the way the integration is going.

At the exhibition, I also asked David Robertson (the FD) about the possible impact of hiked insurance premiums on this year's P+L. It turns out that he had spoken to their insurers only the week before about this very matter - unlike other companies, who were seeing premiums doubled and in some cases even raised seven or eight-fold, the Mears premiums were only expected to be raised by 25% this year. He attributed this modest increase to their history of low claims and the fact that they have excellent on-going health and safety training for all their staff, while for the drivers (who also get regular on the job training) there is a rigid rule - the first accident they have is met in full by the company as "anyone can have an accident", but the driver gets immediate re-training and for any subsequent accidents the driver responsible has to pay the excess out of his own pocket.

Talking of drivers, United Fleet Distribution (UFD) - which was bought by Mears in 1998 and is still run by the original owner - is frequently overlooked in comments on Mears, but is an extremely successful (and profitable) division. They shunt vehicles around - mainly driving them but sometimes using their own transporters - typical activities include taking company or leased cars that are still perfectly roadworthy but have reached the end of their "company lives" to auction houses, and delivering new trade-plated cars. They are one of the largest contractors in this sector, and are used by many blue chip names (e.g. at the time of the last AGM their contract with BT represented 15% of their turnover) - and they were not only growing fast with approximately 1000 cars moved each day compared to 500 a day the previous year, but were also looking to expand their activities. The vehicle distribution division also contributed approximately 19% of group turnover in the 6 months to end June, according to the interims.

http://www.uk-wire.co.uk/cgi-bin/articles/200209030730065835A.html

For the wider picture, Bob Holt sees consolidation as inevitable in the sector as a whole - and while he doesn't seriously see Mears as a take over target itself, he would not be averse to the idea if an offer was felt to create real shareholder value.

And his own target two years from now...?? To achieve a market cap of 150m - and, for what it's worth, I think he will probably achieve it. He also sees a substantial re-rating for Mears as the market cap grows. In the meantime, the company is debt free (initial payments for the M+T acquisition can be made from existing cash in hand), margins are steadily improving and he has every intention of continuing to raise the dividend by perhaps 25% a year.

I think Mears is a cracking little company - it's one of the few I can think of which is relatively immune to any downturn in the economy, plus it's well run and squeaky clean in its figures (including stuff like the point at which they recognise costs/revenues in the P+L)... and as far as I am concerned it's one that I can keep tucked away and practically ignore. No sleepless nights, or frantic short term "nursing" of trades - and that certainly makes a change in the current markets!!



T22

nice to see a more investor orientated post,rather than just day-trading one's.

are u going to the T1PS event this saturday ?

im not sure if mears will have a Stall there ??

Some press coverage this morning....

The Times

Mears Group, the AIM-listed provider of building maintenance services firmed 1p at 69p after announcing that it expects full-year figures for 2002 to be ahead of expectations. Arbuthnot Securities, house broker, now expects full-year sales for 2003 to break through the 100 million barrier, and has raised its current-year, pre-tax profit forecast from 4.5 million to 4.77 million. The broker points out that, on its revised numbers, Mears trades at a 9 per cent discount to its sector, which it thinks undeserved.

http://www.timesonline.co.uk/article/0,,748-557763,00.html


The Independent

Mears specialises in facilities management for local councils. In plain English this means it does maintenance contracts for council houses, handling everything from decorating the stairwells to mending leaking taps.

It is a solid business whose shares have suffered as a result of the de-rating of the support services sector. Mears pleased the market yesterday by saying full-year profits for 2002 should be ahead of expectations. It also said the current year has started well, with a strong order book worth 270m and improved margins.

Bob Holt, the chairman, was even moved to pronounce that the group was better placed to take advantage of market opportunities "than at any time in its history". What Mears has to play for is the 50 per cent of local councils who currently handle their own maintenance rather than contract it out. These contracts can be substantial. In February last year, Mears signed a 10-year deal worth 130m in with Richmond, south-west London.

With the shares up 1.75p at 69p, they trade on 11 times current year earnings. This is a 9 per cent discount to the sector, which looks unjustified for a cash generative group like this. Sector woes may act as a drag, but the stock should outperform its peers. Good value.

http://news.independent.co.uk/business/investment_column/story.jsp?story=373373



T22

PS Eeyore - thanks. No, am not going to the T1ps event... don't like peeople such as Nick Leslau and Nigel Wray.

duly noted.

Tipped again by Investors Chronicle, probably the third or fourht time in the last 3 years. Price up by 2.5%