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Mears weak as 2018 revenue falls, profit misses estimates, and net debt above-forecast

Published: 07:56 19 Mar 2019 EDT

Social housing
Mears pointed out that its average net debt for the year was £113.2mln, missing a target the group had set of £110mln

Mears Group PLC's (LON:MERG) shares dropped on Tuesday after the social housing and care services provider saw its full-year 2018 revenue fall and profit miss estimates, while its net debt was above-forecast.

Posting results for the year ended 31 December 2018, the FTSE All-Share listed firm saw its underlying pre-tax profit increase by 3.8% to £38.5mln, up from £37.1mln a year earlier, while group revenue fell by 3.4% to £869.8mln.

READ: Mears bags £1bn asylum housing contract from UK government

The company said 2018 revenue was hit by subdued demand for both housing and social care services, with housing revenue falling by 1.7% to £753.2mln and care revenue down 13% to £116.6mln.

It pointed out that its average net debt for the year was £113.2mln, missing a target the group had set of £110mln.

Mears said it would reallocate capital to areas that deliver financial returns or use it to cut debt. Concerns about the level of debt carried by outsourcing firms have risen following the collapse of Carillion last year and the demise of Interserve PLC (LON:IRV) last week.

Mears' chief executive David Miles said: "Whilst we will never lose our long-term approach, the Board is considering how Mears can ensure that it retains its competitive advantage, as well as placing greater emphasis on working capital requirements and implications for the Group balance sheet.”

Last year, Mears raised cash through a discounted placing of shares to fund its purchase of MITIE PLC’s (LON:MTO) social housing unit, and also lost a long-running battle with Frankfurt-based activist investor Shareholder Value Management to replace its long-serving chairman Bob Holt.

Peel Hunt cuts target, profit estimate

In a note to clients commenting on the 2018 results, analysts at Peel Hunt kept their ‘buy’ rating on Mears shares but cut their price target to 450p from 500p after reducing their 2019 profit forecasts.

They said the key news was Mears’ decision - post shareholder consultation - to withdraw from Development and Property acquisition activities to reduce net debt by 1x underlying earnings (EBITDA).

The analysts cut their full-year 2019 pre-tax profit forecasts for Mears to £40.5mln, down from £50.8mln previously, to reflect this decision as well as IFRS 16 changes.

They said: “We look for FY 2019 average net debt of £105mln, falling to £80mln in FY 2020 (1.3x EBITDA) as the cash is released from Development/property.”

Mears increased its 2018 total dividend by 3.3% to 12.40p, up from 12.00p a year earlier.

In late morning trading, Mears’ shares were down 8.6% at 265p.

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