Daily Stock Market Report (Thur 7th August 2025) - RBN, EMR, SDG, MER, EPWN, RCP, VANQ, MGAM

Good morning and welcome to Thursday's report!

All done for today, thank you.

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Spreadsheet accompanying this report: link.

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Companies Reporting

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Graham's Section

Mears (LON:MER)

Up 3% to 397p (£343m) - Interim Results - Graham - AMBER/GREEN

Mears Group PLC, the leading provider of housing services to the public and regulated sectors in the UK, announces its interim financial results for the six months ended 30 June 2025 ("H1 2025").

A great headline here: Excellent first half performance; solid growth in Maintenance activities and strengthening operating margin.

Some key points:

• Revenue -4% (£559m), “with some normalisation in the Group’s Management-led activities”.

• PBT +5% (£32m).

• Adjusted operating margin improves from 5.2% to 5.6%.

There are “new orders to a value approaching £1.5bn” in an “abnormally busy period for contract rebids”, and Mears has achieved 100% contract retention.

Major customers mentioned include Milton Keynes City Council, Moat Homes, London Borough of Brent and Aberdeenshire Council.

Current trading and outlook:

The business has continued to perform strongly. Increasing confidence in growth momentum of Maintenance-led activities

The precise timing of the normalisation of AASC revenues [GN note: asylum accommodation and support contract] remains uncertain, but there is a clear political drive to see all hotel accommodation exited during 2026, reflected in today's guidance.

The Board expects adjusted profit before tax for the full year to be modestly ahead of market expectations. This positive performance also gives the Board increasing confidence in its expectations for the next financial year

AASC revenues have been responsible for a large percentage of Mears’ total revenues in recent years, so it’s crucial to try to understand how long this might last for.

In a longer “outlook and guidance” section later in the report, the company provides the following:

ARAP is the “Afghan Relocation and Assistance Policy”.

So both AASC and ARAP are expected to see revenue reductions in the years ahead, with particularly large revenue reductions from AASC.

PBT guidance for FY 25 (left-hand column) and the “Medium term” (right-hand column).:

The margin guidance is for an operating margin of 5.3-5.6% (FY25) and 5-6% (Medium term).

Let’s do the calculation for FY25 - a company like Next (which I own) would do this for us, but not every company is like Next!

FY25 maintenance revenue: £600-606m.

FY25 management revenue: £677m.

FY25 total revenue: £1,277m - 1,283m.

Adj. operating margin 5.3-5.6%, so adj op profit should be c. £68-72m (FY24: £63.6m).

Other factors will reduce that to a lower PBT figure, and then apply 25% tax.

Still, it creates a modest earnings multiple:

Broker estimates

Panmure Liberum have put forward an EBIT estimate of £67.7m for the current year (EBIT is typically the same as operating profit). This is consistent with my calculation of c. £68-72m.

Their previous forecast was only £62.5m.

Future years also get upgraded, but they are still falling with lower AASC/ARAP revenues.

The new EBIT forecast for FY26 is £59.1m (previous forecast: £52.6m).

The new EBIT forecast for FY27 is £56.1m (previous forecast: £50.7m.

EPS is forecast to fall from 50p (FY25) to 41.2p (FY26) and then 38.5p (FY27).

Graham’s view

This is a Super Stock with a StockRank of 99, which is a good reason for me to stay positive on it. Last time, Roland was AMBER/GREEN.

I’m inclined to leave this at AMBER/GREEN, but it’s a close decision. Perhaps I should be fully GREEN?

Pros:

• Cheap earnings multiple.

• The positive earnings surprise today is material with upgrades of >10%.

• 100% contract retention proves a high level of customer satisfaction.

• Net cash of £81m before leases.

Negatives:

• High lease liabilities of nearly £300m (it’s the nature of the business, so a harsh criticism).

• The declining forward profile of earnings suggests that it perhaps should trade on a cheap earnings multiple.

• High exposure to particular contract types (AASC/ARAP) that might not be around long-term.

Most of the negatives are to do with the type of business this is, rather than anything Mears has done wrong. By its very nature, this is a lowish-margin services business tied to large contracts that may be lumpy at times.

On balance, I am more comfortable with AMBER/GREEN, but someone who is more comfortable with the sector might feel that fully GREEN is justified, especially considering the very strong StockRank.

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Vanquis Banking (LON:VANQ)

Up 13% to 116.2p (£261m) - Interim Results - Graham - AMBER/GREEN

This is encouraging:

The turnaround of Vanquis remains firmly on track and is gaining momentum. The Group delivered two consecutive quarters of profitability in the first half and has grown gross customer interest-earning balances over the last three quarters.

I was neutral on this in March, which was overly negative, but the company had just released a profit warning with a big impact on 2025 numbers. It looks like I’ll be upgrading my stance today.

Motor finance: no regulatory impact here (but don’t hold me to this!) as Vanquis did not pay discretionary commissions, and their position “is clearly differentiated from the unfair relationships decision” in the test case. The last time we looked at this, they said something similar - this is really just confirmation of what we already knew.

Financial highlights:

• H1 PBT from continuing operations of £6.2m, ROTE 3.1% (guidance: low single digit ROTE).

• Customer balances grew 7% to £2.46bn, with VANQ set to exceed previous guidance of £2.6bn by the end of the year.

• Complaints down 36% year-on-year, with a big reduction in Financial Ombudsman fees, and complaint costs to fall again in H2.

Income Statement: Net interest income hasn’t changed, but impairment charges and operating costs are both much lower, which gives rise to the small profit (vs. very large losses in previous periods).

Balance sheet: tangible net asset value inches higher to £362m. So the stock is trading at a 28% discount to this.

Tier 1 Ratio: a standard measurement of bank safety, this is slightly lower now at 18.5% but still very high by traditional standards. Perhaps even too high! There is a point at which banks aren’t taking enough risk. Although given the recent losses here, it’s understandable that investors would want the reassurance of a strong balance sheet.

Retail deposits provide 84.6% of VANQ’s financing and the average cost of funds is 5.3% - this is on a downward path as rates gradually fall.

Outlook: unchanged, except that customer balances are ahead of the previous target for 2025.

There is no dividend, which is fair enough given the circumstances. Management are focused on “deploying capital to support growth initiatives”. The dividend question will be addressed again when they’ve delivered their strategy next year.

Graham’s view

I tend to look positively on cheap lenders, although I haven't been able to get off “AMBER” on this due to the losses it was experiencing, and then the profit warning in March as it began to stage a recovery.

In hindsight I was too slow getting positive on it, but for what it’s worth I’m happy to be AMBER/GREEN on VANQ today.

Positives:

• There is still a large discount to tangible NAV.

• No motor finance regulatory issue (I think!)

• Accounts are much, much cleaner than they were before:

There is no dividend yet but for investors who can look past that, I think it's a nice candidate for further research:

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Mark's Section

Sanderson Design (LON:SDG)

Up 9% to 54p - Half Year Trading Update - Mark (I hold) - AMBER/GREEN

While sales here are in line, they are also down:

Group sales in the six-month period were in line with Board expectations at £48.3 million (H1 FY25: £50.5 million), down 4% in reported currency and down 3% in constant currency

Product sales are worse if you consider that licensing sales have grown:

Licensing revenue performed well at £4.4 million (H1 FY25: £4.1 million), with strong growth of 22% in underlying performance (licensing revenue excluding accelerated income under IFRS 15)

However, this is undoubtedly good news as licensing is relatively high margin. The picture is complicated as the accounting regulations require them to recognise the licensing revenue from minimum guaranteed sales upfront, whereas the cash will be received over the next few years as products are developed, launched and sold by licensees. The risk is that if the company pushes to make licensing sales for a period, this will show strong growth, but when the signing of new deals tails off the accounting regulations will mean they show declining revenue. That this figure is growing in a tough retail market is a good sign. Good underlying performance is nice to have, but should be expected from previously signed deals. H2 as stronger than H1 on the licensing side last year. They say FY licensing revenue is expected to be broadly similar (i.e. slightly below)

Looking at the details, all regions are struggling, apart from the US. I’m generally not a fan of US exposure, given the highly uncertain tariff and decision-making environment there. However, their designs appear to be gaining traction in this market, despite the headwinds:

The weakness in internal manufacturing is due to their focus on delivering sales from inventory in the period. So it is good news when they say:

Third-party manufacturing at £9.2 million was in line with the same period last year and, as mentioned earlier, our factories' future financial performance has been transformed by the restructuring initiatives implemented earlier this year. The decrease in internal manufacturing revenue at £5.3 million (H1 FY25: £8.0m) was in line with our planned inventory reduction strategy. We continue to expect manufacturing to achieve break-even, or slightly better, for the current financial year.

I have a theory that they have been slow to react to weakening market conditions and cut costs, and part of this was due to the strength of the licensing revenue. The initial downturn in trading last year seems to have caught them by surprise, and given how strong the licensing revenue was last year, and their net cash position, they could still report a profit on lower volumes, so didn’t want to make employees redundant unnecessarily. However, this lack of action in a market that continued to be weak has led to a brokers’ consensus that looks like this:

They appear to have grasped the nettle now, though. As well as getting manufacturing to break-even on reduced volumes, they are targeting central costs:

Continued focus on cost efficiencies - management is well-advanced with a new initiative to further reduce central overhead costs by approximately £1 million on an annualised basis.

Given the consensus for net profit this year is £3.7m, this would be material to the bottom line, at least when fully implemented. However, the impact is already accounted for this year as they say “The Board's expectations for the full year remain unchanged.” Unsurprisingly, given this statement, brokers’ forecasts are unchanged. The other aspect of this that is potentially positive is that one way to get manufacturing to break-even would be to re-allocate some of the costs centrally. They don’t appear to have done this.

One of the other risks of being tardy to implement cost-cutting measures was that their net cash was reducing, and combined with a new lease on their Chiswick headquarters, meant their financial position was weakening:

This appears to have reversed in 25H1, where they have seen an increase in net cash (excl. leases):

The Group's balance sheet has strengthened in the first half with net cash of approximately £7.5 million as at 31 July 2025 compared with £5.8 million at 31 January 2025 (H1 FY25: £9.6 million). The increase in cash reflects a planned reduction in inventory and net cash is expected to continue to build in the remainder of the financial year.

Paid-for research provider Progressive have £8.5m net cash pencilled in for the FY, rising to £11.8m in FY27. Based on their forecasts, Progressive calculate the business is trading on 2.8x EV/EBITDA, dropping to 2.6x for FY27. This looks too cheap, given that the company now appears to have taken the appropriate action to adapt their business to current market conditions.

Mark’s view

This is ultimately an inline update. However, it also allays some of the concerns I’ve had about this business: were they willing to cut their coat according to their cloth? Would further licensing deals be difficult in current market conditions? Would tariffs have a severe impact on their US business? As such, the current rating of 2.6x FY27 EV/EBITDA looks too low for a company that looks close to a cyclical low in trading. Backing up this view, I calculate that they still trade at a discount to TBV, and I am sure that their intangible assets have value, too, as they are generating decent licensing revenue. I am happy to retain my AMBER/GREEN view (and holding).

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Epwin (LON:EPWN)

Up 30% to 118p - Recommended Cash Offer - Mark - PINK/GREEN

Good news for holders here as it is a takeover offer. The premium offered is the fairly standard 30%ish to last night’s close. Shareholders will get 120p in cash. It doesn’t look particularly generous compared to where the company’s shares have been trading at various points during this year:

However, it is above the level that the shares have traded at in the last 5 years, and I’d imagine that isn’t a coincidence.

Even adjusting these figures in my head for the 30% rise today, this does look like the company is being sold on the cheap:

However, we have to accept that the medium-term revenue growth here is fairly lacklustre:

And the long-term average returns on capital nothing to write home about:

It has been a fairly consistent cash generator, though, and I can see why an acquirer would want to own this:

The acquirer is Laumann Group, a German family-owned business with €1.6bn of sales and €0.8bn of net assets. They are a market leader in PVC window profiles through their brands VEKA and GEALAN, also offering aluminum frames and facade systems, including PVC-based solutions like VEKAPLAN and Vinylit. So they seem a good fit as an industry acquirer:

In the view of the Laumann Board, the Acquisition aligns closely with Laumann's strategic priorities and will help to accelerate the implementation of Laumann's growth plans within the UK, as well as unlocking additional opportunities for operational synergies through sharing know how and technical infrastructure, scale benefits, and complementary offerings across key end-markets.

The offer is recommended by the Epwin board, although they only hold 0.6% of the equity. Laumman has irrevocable undertakings from Kennedy Capital Investments Limited, the trustees of The Anthony James Rawson Business Will Trust and Pentwin Group Limited in respect of a total of 40,500,000 Epwin Shares, representing, in aggregate, approximately 29.8 per cent. They also have a LOI from Otus Capital Management giving around 35% of the shares intending to vote for the offer scheme in total. They may get more now the offer is public. However, I don’t think these would stop a counter-offer if it was forthcoming.

Given the industry, I’m not sure any counter-offer would be that generous. Epwin’s board say:

…the valuation multiple implied by the Acquisition of 6.1 times Epwin's 2024 post-IFRS 16 Adjusted EBITDA is consistent with recent transaction multiples in Epwin's segment of the building materials sector;

However, it does highlight two things, Firstly that wider industry players may be seeing the possibility of a recovery in UK building products on the horizon. Secondly that very similar company, Eurocell is on almost the same rating as Epwin prior to this offer, which may highlight the value there as well:

Mark’s view

Roland rated this as GREEN following their AGM statement in May and he has been proven right to do so as an industry player has also seen the attraction. While I think the chance of a counter offer is slim, and if I held, I’d be tempted to recycle the proceeds into other UK building products suppliers, I see no reason to change the rating at this stage.