Investment Column: Mears looks set to fly as rivals flounder

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Our view: buy

Share price: 254p (-5p)

The Government's goal to massively shrink the public sector by pushing councils to slash their expenditure has led many to the view that the public sector is now largely a wasteland for companies seeking to make money.

However, Mears, the social housing repairs and services contractor to local authorities, appears to be doing rather well in these austere times.

Yesterday, the group, which is also a provider to registered social landlords, said it had secured £120m of new contracts since it unveiled its full-year results on 15 March.

While these contracts were spread across its divisions, Mears' biggest deal was a £52m, 10-year repair and maintenance contract signed with Bedfordshire Pilgrims Housing Association. Under the contract, Mears will provide repairs and planned maintenance services to about 5,200 properties in North Bedfordshire and Cambridgeshire.

Its other major wins include several domiciliary, or home, care contracts worth about £37m over their lifetime, and additional repair and maintenance contracts totalling £30m over four years with councils, such as those in Leeds and Dover. These new contracts have continued the momentum delivered by Mears for the year to 31 December, when its operating profit rose by 27 per cent to £31.3m.

The company's ability to bring in new business has no doubt been helped by two of its rivals – Rok and Connaught – collapsing into administration last year. David Miles, the chief executive of Mears, said Mears continued to "see high levels of opportunity within the public sector", citing his view that the domiciliary care market is about 10 years behind the more developed social housing sector.

Despite his bullishness, potential investors should note that shares in Mears have been highly volatile since last July, although they are down from a 12-month high of 326p in January. As a result, it now trades on a forward earnings multiple of 7.2 on the estimates for 2012, a discount to both its support services and its contracting peers. Based on this lowly valuation and in light of the recent strong momentum, we think that Mears is worth a punt, particularly as it is likely to benefit from further distress among weaker rivals.


Our view: buy

Share price: 237.1p (-11.2p)

ITE posted what by most analyst accounts was a strong set of half yearly results yesterday. The exhibition and conference organiser said adjusted pre-tax profits had climbed by a healthy 42 per cent as its core markets returned to growth.

The group also issued what even the most bearish investor would have to acknowledge was a positive outlook statement. But this was no empty boast. ITE confirmed its confidence in the road ahead when it raised its payout to 1.9p from 1.7p.

Given the update, the company's manifest confidence in the trading outlook, and the fact that ITE's shares trade on affordable multiples of around 15 times forward earnings, we think it's time to move in now. The market should drive up the company's share price as future releases provide firmer evidence of ITE management's confidence.


Our view: sell

Share price: 81.5p (+2.5p)

It's been a rough ride for Xchanging ever since it floated in 2007, and this year has been particularly bad thanks to one day's trading in February when the outsourcer saw its share price halved after an unexpected profit warning and the resignation of its founder, David Andrews.

The group's response was a four-part action plan, with yesterday's interim management statement providing an early update on progress, revealing that a number of senior staff have already been shown the door on these shores while cost-cutting measures have been put in place in the US.

However, further details were scarce and there were also no figures, with none expected until September, That said, the company's claim that trading in the first three months of the year – traditionally a slow period – has been "solid" is encouraging.

The issue is, as the management remind us, that 2011 is a "year of transition", and we are not much clearer on how Xchanging will look at the end of it. The initial signs do provide some optimism, but there are too many unknowns for our liking.