Description

Mears plc is a high return on capital business with very consistent financials of growth and earnings trading at a trailing earnings PER of 12x. It is UK FTSE listed. 

A. The Business

1.1 History

Mears was founded in 1988, firstly a Social Housing maintentance/repair company but later expanded towards Care in 2007.  It employed 15,000 people in 2012.

Mears exists to 'serve the community' and appears to keep this goal in mind (they have expanded many times, but always staying in the same sector, social housing and care).

Mears is a company providing new homes, housing maintenance/repair and daily care for elderly and disabled people. Quality of service is the key differentiator according to the company.

Having almost 15% of their revenue and around 22% of their operating profits coming from their 'Care' department, it is important for Mears to provide excellent service in order to maintain an increase of revenue in this sector, which they have managed significantly well since 2007 – having quadrupled revenues by 2013 (with acqusitions).

They acquired Morrison and Omega (Housing Management).

2. Segmentation

2.1 Business Divisions

Mears organizes its businesses into two main sources of revenue, Social Housing and Care.

Its revenues were divided as follows.

Revenue by Business Segment 2014

Business Unit               Revenues                  % Tot             EBITA Margin

Social Housing                 714.7m                     85.1%              5.1%

Care                                124.0m                     14.9%              7.8%

Total                              838.740m                 100%              5.3%  

As you can see, the bigger part of the business is by some margin the Social Housing division.

2.2: Geographical Segmentation:

Mears only operates within the UK, in no specific county – they take pride in being operational in every region of the United Kingdom.

3. Social Housing

3.1 Business Description

Mears focuses on maintenance work for social housing. This includes:

Repairs and Maintenance (Responsive Repairs, Gas Services, Voids,

Energy (Insulation, Solar, Lighting, Off Grid, Biomass, Funding Advice by team).

Housing Management (Providing and Managing Homes, Contact Centre Solutions, Tenant Led Scrutiny)

New Homes (No mention of actual building, Pre Construction, Commercial, Land, Development Teams).
Home Improvements (Practical, eg. Adapted bathrooms or kitchens, ramps, grab rails. Technology improvements to enhance independence, telecare services, sensors)

Residents (Involving tenants locally nationally, providing clear info)

Estate Services (Estate cleaning, Grounds Maintenance, Soft/Hard Landscaping)

Facilities Management (Total/Hard Facilities Management, Planned Preventative Maintenance, Reactive Maintenance, Soft Facilities Management, Asset Management, Project Management, Lifecycle Management)

Insourcing Solutions

They have 5400 people who are blue-collar workers. In addition, they bought the Omega business, which is the white collar people doing housing management.

3.2 Customer Interface

Customers are mostly Local Authorities, Registered Social Landlords, and some private landlords

The housing in question, it is public and non-profit, owned by landlords. Framework agreements are drawn for standard ad hoc repair services. Contracts are long term and tendered - contracts tendered up to 20 years inflation protection. The service (package) is for keeping a certain quality level of flats. Mears targets landlords with 5000 units, and below 1000 is low and they don’t focus on this market. Besides there overall contract, there is also a framework contract for standard rates for ad hoc repairs. Mears is blue collar workers mostly. Their new division (acquired with the Omega acquisition) is white collar – and they manage properties for clients (similar size, growing quickly is this market, so big opportunity).

Social Housing – Contracts of which 50% come from local authorities and 50% from housing associations. These range from smaller contracts to larger multiple year contracts. They are payed for achieving.

Mears tracks each assignment, with every assignment has to be profit making.

There are roughly 7000 workers in the Social sector, around three quarters are operatives, and the rest are office workers. A specific example he mentioned was only a handful of workers work in the Energy department while the Repairs and Maintenance department has the most employees. There are around 500 people in Senior Management.

3.3 Sales

There are no sales in the traditional sense as by law things are tendered. 180 branches, members run branches. There are general managers who then interact with the customer i.e. the local authorities. Give a good bid. If you are the incumbent its easy as you are in the client’s office.

I would’ve worked with them for a long time next to the housing authority. The loss rate of a contract is < 5% -> when someone screws up. Annualized the rate is even lower.

4. Care

4.1: Business Description

The care business serves elderly and people with learning and physical disabilities. There are 11,000 blue color workers, who are interacting with customers on a daily basis. Some of what they do include:

Personal Care and Support

Cooking/Cleaning

Live in Care (24 hour companionship/care – instead of residential care)

Support for Getting About

Support After Stay in Hospital (short term, until customer back on his/her feet)

Support for Holiday (Support during time away on holiday)

Adapt Home for Needs

End of Life Care

Support for People with Learning Disabilities

Care for People with Dementia and Alzheimer's

In addition to this, there is also a Nurse Plus services. 

Mears Nurse Plus

Continuing Healthcare Services
Nurseplus Services (Hospital to Home, Home Healthcare, Away from Home Care)

4.2 Customer Interface

The customers in Care is foremost again local Authorities, there is also some work for the NHS, and charities, and community groups.

Mears also has long term contracts (5-8 years) with its customers in the Care sector.

The hope here is that more of the payments will be outcome based rather than simply GBP per hour work.

Care – All contracts concerning care come from local authorities and unfortunately 95% are 'by the hour' contracts however 5% are now based on performance. The management believes this will increase in the future as a result of society slowly changing, coming to the realisation that in the Care sector performance is more important than the hours. This would, in his opinion allow the Care side of Mears to perform much better due to skilled employees. They claimed an average of 12-13 pounds per hour for Care.

There are around 12000 Care workers due to the recent acquisition of Care UK. Most workers are part time and some are volunteering. On average a worker works from 20 to 25 hours a week.

5: Service Quality

Both Housing and Care are services business, so service quality is very important.

Mears reports that 91% of their customers rate the service as “excellent”.

This is for Housing.

6. Acquisitions

Omega – Omega buys properties from the private sector and rents them out to the local authorities. They also buy properties which are in bad condition from both the private and public sector, repair it and rent it back out to the local authorities in the form of long term accommodation.

Mears plans to invest a lot into Omega as it has no competition and a lot of potential with so many homeless people, and in general a shortage of homes in the United Kingdom.

7. Competition

7.1: Key Competitors

Some direct competitiors of Mears include Mitie, Gilmartins and Interserve. Gilmartins only covers some parts of the United Kingdom while Mitie focuses mainly on the private sector, social housing only accounts for around 4% of its revenue.

Interserve is a competitor in the Care sector, though arguably not a large competitor, has a much smaller market share.

Other than these, Mears has few direct competitors on the same tier concerning Omega, Social Housing or even Care.

B. Economic Characteristics

1. Consistent Growth

From 2001 to 2010 revenues grew by 22.6% p.a. on average, for the last four years this figure varied much more. The growth in 2014 was negative. The result last year was a lot due to the loss of business from one of the new acquisitions made, so it was expected. Overall, Mears has a very good track record of achieving both organic growth as well as growth through M&A.

It’s difficult to derive a clean exact split between organic and inorganic growth, but both are significant.

Sales and Revenue are expected to increase, as demand for housing continues to exceed the supply, this in turn can pressure Authorities to build more Social Housing – shown by plans for 200,000 new affordable houses by 2016. Mears has grown extremely quickly to a Market share of 14% in the Social Housing repair/maintenance sector.

The aging population also creates more potential customers in both the Care sector, but also the Social Housing sector.

Mears' main challenge is therefore competing for the expanding market base in order to obtain an even larger market share.

The Social Housing sector should expand as there are significant numbers of underserved in the UK; there are also few competitors left.

According to mgmt., Mears is reputable for its quality of service, and how this is the reason they didn't go bankrupt such as one of its competitors around 5 years back.

2. ROTCE

Mears is relatively asset light: Its PPE is only GBP 18.4 million; including the 31.8 million in intangible assets, Mears has a fixed tangible capital base of roughly GBP 50 million. As NWC is negative (payables are > receivables and inventory), Mears has a very low total capital employed. This leads to very high returns on capital > 30% .

C. Risks

1. Governmental Budgets

Management believes there is little risk in the Housing division because money made from rent by the local authorities cannot be spent on anything else apart from repairs (as of the regulations in place now). Therefore even if the government is going bankrupt, the local authorities should still be able to pay for repair, maintenance etc.

Still, in Care and I would imagine also in Housing, if we have significant pressure on UK budgets, there could be an effect on what they pay. A counter argument could be made that it makes it even more likely that Councils will outsource the work rather than do it inefficiently themselves, but there is uncertainty.

2. Pensions

The gross liability of the 32 quoted defined benefit pensions, seems to be about GBP 110m. Although this is fully funded, there is a not large, but not insignificant defined pension plan for Mears.

D. Valuation

The valuation metrics presented above are summary numbers from Capital IQ. The valuation based on the current level of earnings, I think is conservatively sustainable is about 12x PER.   

Catalyst

Continued compounding and improvement to low valuation.