March 19, 2019 / 8:50 AM / 3 months ago

UPDATE 2-Britain's Mears hit by profit drop, debt rise as demand wanes

* Annual underlying pretax profit misses estimates by 3 pct

* Net debt higher than target

* Revenue hurt by housing and social care services demand

* Interserve, Carillion have wider impact -CEO (Adds CEO comments, details, share movement)

By Noor Zainab Hussain and Sangameswaran S

March 19 (Reuters) - Mears shares slumped on Tuesday after the British housing and care services provider’s pretax profit fell short of estimates and its net debt was higher than forecast.

Revenue for 2018 was hit by subdued demand for housing and social care services, businesses that Mears has focused on while moving away from its roots in contracting.

Mears said it would reallocate capital to areas that deliver financial returns or use it to cut debt, after reporting its average net debt for the year was 113.2 million pounds ($150 million), missing a target it had set of 110 million pounds.

Shares in Mears, which fell more than 20 percent in 2018, were 8.6 percent lower at 265 pence at 1043 GMT.

Concerns about the level of debt in British outsourcing firms have risen following the high-profile demise this year of Interserve, one of the British government’s biggest contractors, and the collapse of Carillion.

“It is frustrating because unlike other organisations we only do housing,” Mears’ chief executive David Miles said, when asked if there would be a knock-on effect from Interserve being taken over by its creditors and the failure of Carillion.

Miles said there would be both a negative read across for investors and on the willingness of banks to lend to the sector.

“We are in no way close to Interserve. We made 40 million pounds in profit, we have low debt. Our debt is 2 times EBITDA (earnings before interest, tax, depreciation and amortisation) and literally 6 months ago I was getting criticised about you know why we don’t use more debt,” Miles said.

Mears, which was founded in 1988 as a maintenance company with one van in Gloucestershire, also said it would not be starting any new housing development sites, resulting in some reduction in the previously expected rate of revenue growth.

“We will review how Mears can best contribute to the housing development needs of our customers but in ways which do not place undue strain on the Group balance sheet,” it said.

Investec analyst Michael Donnelly cut his financial year 2019-2020 pretax profit estimate by 19 percent after Mears reported a 3.8 percent rise in underlying pretax profit to 38.5 million pounds, about 3 percent short of consensus estimates.

The results follow two tough years, with the deadly Grenfell Tower fire in 2017 leading landlords to delay new contracts while they reviewed safety measures.

Last year Mears raised cash through a discounted placing of shares and lost a long-running battle with Frankfurt-based activist investor Shareholder Value Management to push through a board change. ($1 = 0.7530 pounds)

Reporting by Noor Zainab Hussain and Sangameswaran S in Bengaluru Editing by Saumyadeb Chakrabarty and Alexander Smith

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