Derek Pain: I'll stick by Mears despite its losses for eventual profits
No Pain, No Gain
Saturday 31 March 2012
Mears has responded in some style to the tribulations and uncertainties that have engulfed it in the past 15 months. Profits of the support services group were at least in line with expectations and there are high hopes it is recapturing its old, winning ways.
The shares started last year at around 325p. They slumped to near 240p on worries about its treatment of pension cash.
A partial rally was wiped out by a subsequent profits warning, albeit a fairly mild one that was due to the group's withdrawal from solar energy. Still, the price collapsed to not much above 200p, its lowest since 2009 – all a far cry from the 385p peak hit in earlier years when Mears could do no wrong.
As I write, the shares are above 250p, reflecting more encouraging prospects. However, sentiment was not helped when Bob Holt, chairman and founder, sold shares a few days after the figures. Most were option conversions.
He unloaded two million shares at 250p having acquired 1.5 million of them through options each priced at 1p. His current shareholding is zero, although he still has an options interest. In 2010, Mr Holt's pay fell from £960,000 to £465,000.
Mears was one of the no pain, no gain portfolio's early successes. It acquired shares at 23p, selling at a handsome profit. I was tempted back four years ago at 272p.
So far, then, a loss-making investment. However, last week's profits declaration covering 2011 and the rather more positive atmosphere encircling the shares has prompted me to stick with the stock. After all, the portfolio is a buy and hold investor, and not afraid to absorb losses if there is a reasonable prospect of eventually achieving profits.
Many regard long-term investors as rather passive people, prepared to put up with an inordinate degree of failure. I believe such an attitude is illusionary. Any investor should consider selling when the picture at a company changes adversely.
I'm not certain about the extent of changes at Rivington Street Holdings, my one and only share traded on the fringe Plus market. The share price, however, tells an alarming story. Since the summer it has fallen from above 50p to just 10.5p.
I warned a few weeks ago that I would ditch the shares if the deterioration continued. Well, on Thursday of last week, I decided enough was enough, and sold at 13p, losing a little over half the portfolio's £5,000 stake. I intend to continue monitoring the financial and software conglomerate because it seemed such a promising creation. I believe one of its problems is accountancy changes forced on it by the intended elevation to AIM.
The move upmarket was, it is said, instigated by some major shareholders. I wonder if they now regret prompting the AIM switch.
Back to Mears. Adjusted, pre-tax profits came out 9 per cent higher at £31.5m, with the two major divisions, social housing and home care, making progress. "True" pre-tax profit emerged at œ20.6m against £16.4m. Group revenue was also up – by 12 per cent to £589m and the dividend is hoisted 11 per cent.
There is no doubt that the group has performed well since it arrived as a quoted company – at 10p a share – towards the end of the last century. Indeed, it has a 16-year record of unbroken progress. And, according to the stockbroker Collins Stewart, mirroring I believe the present stock market attitude, the Mears success story should continue. The group is likely to win more social housing and domiciliary care contracts and is also on the takeover trail.
Collins analyst Julian Cater expects this year's adjusted profits to come out at £34m and hit £37.6m next. Target price is 325p. He expects a share re-rating, driven by the group winning new contracts.
Two other constituents are in the news. Northern Petroleum has attracted a 120p target price from analyst Emily Ashford at stockbroker FinnCap following indications of a bid for Wessex Exploration.
The possible offer, it seems, stems from Wessex's 1.25 per cent stake in an oilfield off South America. Northern Petroleum, around 90p, has a similar interest.
And Animalcare announced authorisation for a new veterinary medicinal product it is launching. The shares are now, at 173.5p, just above my buying price.
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