The Investment Column: Mears will continue to put smiles on investors' faces
Greggs; Worthington Nicholls
Wednesday 12 March 2008
Our view: Buy
Share price: 284p (+4p)
The front page of Mears' website claims that the company is making people smile. Among those smiling yesterday were the firm's shareholders after it posted record results.
Mears is in the business of repairing and maintaining social housing, and if the results are anything to go by they are pretty good at it. Typically the company will seek to sign long-term agreements with local authorities, which goes a long way to protecting it from economies uncertainties. "It's a safe haven for investors at the moment," say analysts at Investec, who point out that the group's order book stands at £1.4bn, providing "visibility on 97 per cent of 2008 sales and 77 per cent of 2009".
A further fillip for investors is that the group is expanding its operations in the care sector, to make it it a one-stop shop for local authorities looking to outsource this kind of work as cheaply as possible.
This does have its drawbacks, according to analysts at Numis, who say that "the entry into [the care market] has been expensive". This is something the company's chairman, Bob Holt, rejects, saying that the only real risk to the group in 2008 is reputational.
Numis also points out that Mears is one of a number of suitors bidding for the healthcare group Nestor, and suggests that the company would need to issue equity to finance such a move. Mr Holt does not rule out a move for Nestor, but analysts at Investec say that it should not put investors off buying the stock, and anyway they might not win the bid. But even if Mears does buy Nestor, investors could reap the rewards that will come by being able to offer a more integrated service.
Analysts point out that while the demand for social housing means that local governments will never be able to cut funding entirely, they will always look to make savings, which could well come in the form of bundling up services and outsourcing them to firms able to undertake a number of tasks. Operating profit is up 36.5 per cent to £17.1m. Buy.
Our view: Hold
Share price: 4347p (+118p)
Sausage rolls make up 11 per cent of the bakery group Greggs' sales; surprising, you might think, in these health-conscious times. What might be more surprising is that because of these sales the company is thriving.
The group's preliminary results show that it is doing well despite being forced to increase prices by 5 per cent in the last year; at the same time sales are up 5.3 per cent. So far, customers have swallowed these costs, allowing the group to post a record profit of £51.1m; an annual increase of 27.1 per cent.
Despite the good news, some analysts point to a number of possible pitfalls. Commodity prices are on the up – the cost of wheat has soared by 151 per cent in the last year – and some wonder how long the group will be able to pass on these extras costs to customers.
Another reason to be cautious, argue UBS, is that the group's managing director for the last 24 years, Sir Michael Darrington, is to leave the business.
Most watchers reckon that 2008 will be another good year for the group. Food inflation will continue to rise, up as high as 10 per cent say some, and fewer people will be found on the high street, put off by economic worries. However, the consensus is that Greggs has a loyal following and a solid balance sheet, which should ensure that 2008 is another good year. Hold.
Our view: Sell
Share price: 11p (+1.5p)
It has been a torrid few months for Worthington Nicholls, a provider of support services to the heating, ventilation and air-conditioning sector.
The company's troubles stem from what the new board, led by chief executive Simon Beart, describes as accounting irregularities made by the previous directors who were replaced in November last year.
Despite decent figures during the early part of 2007, financial shortfalls emerged later in the year, plunging the group's value from £140m last April to £8.5m today. Things are so bad that the group feels the need to change its name to Managed Support Services, because of the damage done to its reputation.
Analysts at Daniel Stewart say that investors should sell the stock. They say that they are surprised that the new management has not yet made greater inroads, and that they will only be happy when the group stops haemorrhaging money, or at least when things appear to be stabilising.
Intriguingly, Mr Beart, a turnaround specialist who describes his job as doing venture capital in public, does not disagree with this assessment, saying that his job is either to liquidate the group's assets or to try to maximise their value. He prefers the latter, but stresses that this will take time and requires shareholders' patience.
To his credit, Mr Beart is literally putting his money where his mouth is; yesterday he bought 350,000 shares in the group at 8.1p. Sell.
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