Derek Pain: Sharp reverse can't quash Mears' potential

No Pain, No Gain
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The Independent Online

Record profits failed to inspire Mears, the support services group. Since the middle of February, when I suspect the stock market first got wind of this month's likely figures, the shares have slumped from 280p to as low as 213p.

Although such blatant misfortune is not entirely accidental, it does illustrate that in these torrid days some investors are particularly vicious when they feel short changed.

There is little doubt that the shares, particularly at their current level, are attractive. The group remains one of the best defensive investments with its string of social housing and domiciliary care contracts with local authorities and other public bodies. Indeed, David Brockton at the Arbuthnot financial group regards the shares as "a strong buy".

So why have they taken such a bashing? Some seem to think it was mainly a little weakness at the smallish (around 5 per cent of profits) engineering division. I am not so sure. The profits performance could be regarded as disappointing. I had expected this constituent of the No Pain, No Gain portfolio to produce a pre-tax figure of more than £20m. In the event, the unadorned pre-tax result was £16.6m against £15.5m. True, if certain non-cash charges are added back a figure of £22.2m becomes apparent.

I realise it is all rather cosmetic. But it does not take much to upset this jittery stock market. And confusion over headline results cannot help. With the support services segment under some pressure in the past month it is, perhaps, not so surprising that such a relatively highly rated share should suffer a sharp, if unjustified, reverse.

What about the current year? Chairman Bob Holt is upbeat. More contract wins, and I suspect acquisitions, are likely. On the social housing front, 89 per cent of this year's revenue and 45 per cent of next year's is already in the bag. And Holt comments: "There are tremendous opportunities with existing customers to unlock significant additional revenue." A pre-tax figure, presumably subject to adjustments, of £23.3m is expected.

It's been a busy time for Holt. His second string company Wyatt, another portfolio member, has produced a transformational deal that, I hope, will turn it into a rewarding investment. Mind you, it would be unrealistic to get too excited. Wyatt has, on a number of occasions, flattered only to deceive. Indeed with the shares bumping along at a mere 1.875p I should have sold long ago. But I stupidly held on until any sale seemed pointless.

The company, involved in online employee benefit services, is hoping to raise nearly £900,000 through a placing and open offer as part of a plan to move into the energy performance market, worth about £1bn. Wyatt is acquiring businesses that operate in this fledgling field which has been given a boost by the European Union's fascination with energy performance certificates. So, if the all share takeovers go ahead, Wyatt, changing its name to Green CO2, will offer energy certificates as well as Home Information Packs, which now have to contain the energy requirement.

In every sense Wyatt is a tiddler. And the transaction, in City terms, is pin money. Yet it has felt obliged to produce a near 150-page document to support its expansion and incurred costs of £250,000, plus VAT. Surely an example of grotesque over regulation.

Two other portfolio constituents have been active., now providing frequent updates, said trading was in line with expectations, prompting Jon Lienard at stockbroker Brewin Dolphin to reaffirm his 40p target price. And Whitbread, the budget hotel, coffee shop and pub/restaurant group, rolled out a fairly encouraging trading statement although admitting it has felt the recessionary pinch in recent months.

When I selected Whitbread for the portfolio, I felt it was a good bet to withstand consumer belt tightening with its value-for-money approach. But some are now questioning its ability to prosper in such a cash conscious environment. For the year just ended, profits of around £220m seem likely although a slight decline could be on the cards this year. But Whitbread has a strong balance sheet and offers a near 5 per cent dividend yield.

Stockbroker Seymour Pierce suggests the shares are an excellent "value play". Unfortunately it is talking about a price near 800p; the portfolio paid 1,105p.

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