Mears to keep followers happy

Derek Pain: No Pain, No Gain

Shares of Mears, a little maintenance services group, have enjoyed a splendid run since it reported interim figures at the end of last month. They are now at a peak of 33p. Analyst Roger Brocklebank at the Old Mutual investment group believes there is a case for a price much nearer 50p.

Shares of Mears, a little maintenance services group, have enjoyed a splendid run since it reported interim figures at the end of last month. They are now at a peak of 33p. Analyst Roger Brocklebank at the Old Mutual investment group believes there is a case for a price much nearer 50p.

They arrived in the no pain, no gain portfolio in April at 23p. I must admit I was apprehensive about them and at the last moment almost reversed my decision to include them.

My anxiety stemmed from a sudden surge in the share price. When I examined the company I was impressed by its attitude, management, prospects and record. At the 19p they then stood, I felt, the shares looked an ideal buy.

But the rapid advance to 23p put a different complexion on them. Such a movement by the low-priced share of a small company looked as though I had missed the boat? Luckily, I stayed aboard. And the portfolio is the beneficiary.

When I alighted on Mears it had just produced encouraging figures which, I felt, the stock market had overlooked, as it often does with small companies. An internet tip service apparently came to the same conclusion and its enthusiastic online comments spurred the sudden advance.

Now the Mears half-year figures have underlined the company's undoubted strength. Interim pre-tax profit was £850,000 against £412,000 with the dividend (an often-overlooked factor in modern investment) again increased.

Mr Brocklebank sees year's profit of the AIM-traded group emerging a little below £2m with £2.4m next year. My guess is he is being rather cautious.

Mears is run by Bob Holt, ex-Mitie, the highly successful building services group. It could be argued that Mears closely resembles the much-smaller Mitie of a few years ago. Mr Holt, who is 45, was once chief executive of Tottenham Hotspur and was at Blue Arrow, the controversial recruitment group.

He is keen to expand Mears, and acquisitions, probably in the North, are likely. But with its growing profitability and a strong order book - around £110m - it must look an enticing takeover target. It is thought to have had approaches but talks clearly failed. Some believe it is such a well-run and progressive company that it cannot hope to retain its independence much longer. At the present price it is capitalised at only £16.6m.

A great many successful small companies are, on traditional measurements, undervalued. Mears is no exception. The shares are selling at less than 10 times prospective earnings, roughly half the sector average. A direct comparison with Mitie, probably selling on more than 50 times expected earnings, is unjustified. Even so such a yawning rating gap is too wide.

Another feature in Mears favour is that unlike many small players, it is not shunned by institutional shareholders. Eaglet Investment Trust, admittedly specialising in small companies, has 20.6 per cent. Other declared holdings take the institutional presence to more than 40 per cent. Directors have 20.3 per cent.

The group operates from 30 branches and has extensive links with local and other public authorities. Most of its contracts are long-term.

It is under contract to maintain around 140,000 local authority houses, out of a total of 3.2 million or so. Therefore the potential to win new business on that front is considerable. In fact, Government plans to increase spending on housing and education should ensure Mears continues to prosper.

Certainly it seems, at least on trading grounds, that Mears will be able to keep its followers happy. But the stock market's failure to embrace small companies could inhibit the shares. But they are destined to retain their membership of the no pain, no gain portfolio and even at their present price are still a worthwhile buy.

Dru Edmonston at stockbroker Durlacher is, like Mr Brocklebank, keen on the shares. He thinks they are a buy up to 35p.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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