Construction firm Mears Group PLC (LON:MER) said the recent tragic events at Grenfell Tower would have an impact on its housing division’s performance this year.
The group said in its half-year results that it expected its Housing division’s clients would review the commissioning and safety practices at their properties, which could lead to delays in planned works orders this year. Mears therefore expects Housing revenues of around £800mln in 2017, compared to previous expectations of £830mln, with a concomitant hit to profit and a lower overhead recovery.
In the first half of the year, Mears took in revenue of £470.8mln, up a tad from £466.2mln in the same period of 2016.
READ: Mears in hairy predicament with union after banning workers from having beards
The Housing division, which accounts for 85% of group revenues, saw revenues rise to £402.1mln from £389,6mln, while the Care division saw revenue slide to £68.7mln from £76.6mln.
Adjusted profit before tax edged up to £18.3mln from £18.2mln, but, in an expression of confidence in the business, the board bumped up the interim dividend 5% to 3.45p to 3.30p.
Net debt at the end of June had grown to £19.6mln from £14.1mln a year earlier, reflecting the increase in working capital required to support the new contract mobilisations in 2016.
This is also reflected in the cash conversion of 70% of underlying earnings (EBITDA) from continuing operations over the rolling 12-month period to June 2017 (2016: 91%). Cash generation for the full year is expected to be in line with historic norms in the 90-100% range.
"In Housing, Mears is increasingly being asked by customers and other stakeholders to take greater involvement in helping customers deliver appropriate housing outcomes for a range of tenants and utilising a broader range of services; consequently, the Mears addressable market is becoming much larger than it was previously and more complex.
"Our strategy to broaden our service offering has created a significant sustainable competitive advantage for Mears,” declared David Miles, chief executive of Mears.
"Despite continuing to find the Care market challenging, we have made good ongoing progress in this area and our order book is significantly improved with a portfolio of good quality contracts at clear, sustainable margins.
"Given the scale of the reductions in the portfolio in the last twelve months, the revenue performance of Care in the period is encouraging. We remain confident we have the right strategy and the business is best placed to take advantage of industry evolution as it happens,” Miles added.
House broker Liberum left its estimates unchanged for the Care division but disruption in the Housing business prompted a 9% cut in the forecast full-year earnings per share for the group to 30.6p.
The broker echoed management’s view that the 10% decline in revenue from Care was better than expected.
“There continue to be good long term drivers for Care and pressure is still mounting on the government to improve funding,” Liberum observed.
“The tragic events at Grenfell have caused significant disruption. A Guardian article in August explained how residents of Ledbury estate in Southwark have bene moved out of their property,” Liberum noted.
“Southwark is a Mears contract and we would expect no discretionary maintenance while the buildings are empty. At Milton Keynes, a contract worth potentially £60m p.a. to Mears, the council is focused on fire prevention on existing stock rather than upgrading existing stock and creating new stock. Documents we have seen suggest it is questionable whether more funding may be made available; however, longer term, we expect that LAs [local authorities] may seek to disintermediate Arm’s Length Management Organisations (ALMOs). If RSLs [registered social landlords] and housing associations cannot deliver safe accommodation, they may be forced to merge, sell housing stock or outsource,” Liberum suggested.
Russ Mould, the investment director at A J Bell, said the profits warning from Mears was another blow to the support services sector, where firms such as Aggreko, G4S, Interserve, Carillion, Serco and Mitie have already badly disappointed, albeit for a wide range of different reasons.
“The good news is that Mears has nothing like the debts or pension liabilities which have weighed so heavily on the share prices (and operational assets) of Carillion or Interserve, as net borrowings come to barely £20 million,” Mould said.
“Chief executive David Miles quantified the financial impact of clients reviewing safety and commissioning practices in the wake of the Grenfell fire as the loss of some £30 million of sales this year at the Housing business, or 3% of analysts’ forecasts for the group total.
“Mr Miles also warned of a possible £4 million profit shortfall at Housing, as margins will now come in between 5.3% to 5.5% rather than 5.6% to 5.8% at the division.
“That represents around 9% of the consensus analysts’ profit forecast for the year, which explains why the shares fell by 9% within the first hour and half of trading today,” Mould observed.
Shares in Mears were down 8.7% at 443p.