Derek Pain: Patience pays off as Mears emerges from the wilderness years

No Pain, No Gain
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The Independent Online

It has taken quite a time but Mears, the support services group, is at last justifying its re-inclusion in the "no pain, no gain" portfolio.

I descended, for the second time, on the shares in March 2008 at 272p a pop. On a number of occasions since, I have experienced acute discomfort as the price failed to display the sort of action I had anticipated. At times the shares hovered around the 200p mark and seemed destined to go much lower.

But patience is a virtue in the investment world. Last week the shares briefly hit 436p and, as I write, they are around the 415p mark. The price has made dramatic headway since April and the shares are now selling at some 15 times forecast earnings. It would, therefore, be unwise to expect such progress to continue as they have probably caught up with events. But the stock market is about anticipation and Mears is clearly rolling along nicely. There must be every chance that the shares will go on to hit new peaks.

I have no present intention of selling. The portfolio is a buy-and-hold exercise and all the signs are that the group is now benefiting from previous developments.

Two takeovers have contributed to the new, more flamboyant Mears. Last year the social housing and home-care group acquired Morrison Facilities Services. It had decided that the struggling business would fit nicely into its operations. In April came the second acquisition, a Scottish care firm called ILS.

Last week Mears announced the result of its modest shopping spree along with its half-year figures. Morrison's social housing operations have been integrated far more quickly than originally expected and are on the verge of contributing to profits. And ILS, which did not arrive until late in the half year, has given it more clout in home care. Social housing revenue surged 76 per cent; home care's improvement was a more subdued 8 per cent.

The outcome was a top-notch profit performance at halfway. The underlying figure was a record £15.5m, although at the pre-tax level the returns were not impressive. In fact, the pre-tax figure slumped from £10.3m to just under £4m. Costs associated with Morrison did most of the damage.

Stockbroker Canaccord Genuity expects the full year's profits to be £36.7m and is looking for £42.4m in the following year. And it rates the shares a buy with a 490p target price. Investec also believes the shares are worth buying, although its target price is a less flattering 440p.

Mears, which is paying an increased interim dividend of 2.5p a share, has already contributed towards the portfolio's coffers. It had been an early recruit at 23p a share. I subsequently sold at 84p.

I also intend to stay with Whitbread, the leisure group, although I note that stockbroker Panmure Gordon has joined the ranks of those advocating that the shares should be sold. The broker had hitherto rated the shares a hold but now appears to feel that Whitbread's Premier Inn budget hotel operation, and its Costa Coffee chain, will reach saturation in this country sooner than many expect.

Findel, the home shopping and education supplies group, is one of my last recruits, arriving in November last year. The shares have enjoyed a good run and I see that stockbroker Oriel Securities has a 260p target on them. They are currently around the 218p level compared with the equivalent of the 142p paid by the portfolio.

Finally to Brightside, the insurance group, where extra time to produce a bid has been granted to a possible predator, Markerstudy. The deadline is now the 10th of next month. Brightside shares hover around 27p, the proposed offer price.

I am still seeking to add to the portfolio. Many observers believe that the stock market is looking cheap. However, I am finding it difficult to latch on to the type of bargain that appeals to me.

Last week I mentioned that Conviviality Retail looked interesting. But the shares have moved ahead quite rapidly and do not now look the bargain they did when the Bargain Booze chain floated at 100p a time.

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