Mears Group PLC (MER) – Stock Valuation Analysis by Bargain Value
The next company we are going to analyze will be Mears Group, which is another one from “Service support” sector. It provides property support, such like maintenance, repairs, estate cleaning etc. Mears Group is included in FTSE Small Cap with a capitalization of £ 436.33 ml.
Purchase price (11.12.2015): 432.00 GBp
Let’s take a closer look at this stock and judge if it could be a “Pearl”. The main thing I like here is the stability features. First, the revenues chart below:
Very long and stable, growing trend, almost perfect. The last period is characterized by stagnation and even small decrease. although, there is nothing to worry about, because in the long run the revenues have been growing by £ 67 ml annually (2004-2014). We can still easily predict future level with quite high probability and we can be almost 100% certain, that there will not be any sudden fall.
Chart with operating profits back up our findings:
EBIT also looks very good, except of the fall in 2013. It is related to an exceptional costs of £6.5m, primarily relating to the integration and restructure following the Morrison acquisition. It is reflected in EBIT as a higher amortization (intangible assets). The effect of the same event, we will see on the net profit chart below:
Moreover, we can see here higher costs connected with this transaction and with disposal of one of the non-core business unit, which has generated the loss of £18,5m. These are one time events and as we can see after them, net and operational profits are back on track and we can expect, that this situation will maintain for a long time.
We have seen a decline in net profit, but what about margins?
After the harsh period with higher costs, the margins are back on growing track. The perspective for the future seems to be very good.
The same fact, can be spotted on the ROE and ROA chart:
We should look on the most recent period, because the long-term fall is connected with changes in capital structure of the company. The equity is rising about 14% annually and the total assets about 11%. What’s important, the profitability indicators are on the good track.
Next, we are going to look at Cash Flows:
Two important facts are visible on this chart:
- healthy, positive operating flow,
- 4 periods with high, negative investing flows.
We can assume, that the company’s target is to expand and in order to do this, it purchase one company and reorganize structure. This actions make sense, because as we see earlier, net profits are rising.
The debt level is healthy too:
During the last 9 years it has been moving in the channel from 40% to 65%. From 2013 it is going down. We can be pretty confident, that the company is not in danger of bankrupcy.
However, when we look on the chart below, we should say, that the liquidity could be better:
Level of this indicator is only slightly above the sacred “1” (1.18 in the first half of 2015). It is not good, but Mears Group is operating around this level for a long time and nothing bad happened. We would like a little bit higher value of current ratio for the safety, but it seems, that the management know what they do and there is no reason not to trust them.
Now something for dividend seeking investors:
Cash giving to shareholders is rising. 2.47% yield is not very high, but still quite generous. The company revenues and profits are rising and we can expect, that the tendency will be sustained. Due to this fact, dividend per share will be growing too. For the last 10 years, the average annual pace has been 19%.
At last, but not least. How much we need to pay for Mears, if we would like to buy it now?
The green colour is everywhere. The company is very CHEAP. There is no threat of overpaying and Mears Group has got a wide space to grow.
As we can see on the chart above, the comapny’s stock price was the higest during the April 2014, on the level around 540.00 GBp. Even if the price comes back to that level and the net profits stay on the same level as in 2014, the P/E ratio will be around 21.75, which is still below the average for the industry. Due to this fact, there is no reason, when the price should not go up and produce some fair returns to investors in the near future.
Mears Group is the company, which knows how to generate profits. Trends on them are positive. It shares the growing returns with its shareholders and have healthy, stable financial situation. As we can see, the company is clearly undervalued and it is a great chance, that we have a “Pearl” in our hand.
Current price (12.01.2016): 449.50 GBp (+4.1%)
Price chart has been drawn from the LSE site