Walk past almost any building site, and you're likely to see a palette of building materials with the name Marshalls written on it. And it's the renaissance in construction coupled with rising profitability that is propelling the building materials supplier's strong performance. A combination of strict cost control and a diversified revenue stream has already seen Marshalls (MSLH) double pre-tax profit between 2010 and 2014, and we think there's plenty more to come.
- Strong end markets
- Low level of debt
- Significant operational gearing
- Tight control on costs
- Modest dividend payout
- Domestic sales yet to take off
Crucially, the business model embraces a high level of operational gearing, whereby the impact of an increase in sales results in a proportionally bigger rise in profits. This should further benefit the group as demand for stone and concrete landscaping products accelerates. In 2014, for example, sales rose 17 per cent, which pushed pre-tax profit up a whopping 72 per cent, and helped to increase operating margins from 5.2 per cent to 7.1 per cent. Meanwhile, efficient management of working capital last year boosted the return on capital employed from 8.1 per cent to 12.5 per cent.
The solid performance reflects the group's success in identifying those parts of its market that promise to deliver the highest growth rates. At the moment, these include rail, new-build housing, water management and street furniture (paving slabs, etc). Demand here has been boosted by a long overdue rise in infrastructure spending. This has led to a strong increase in Marshalls' commercial and public sector sales, which account for about two-thirds of revenue and rose by 15 per cent in the first half of 2015.
Sales for domestic building work have not kept pace. Still, this side of the business grew by 4 per cent in the first half and there are signs that this could accelerate as disposable incomes grow faster than inflation, while any uncertainties generated by the general election are now water under the bridge. In fact, a survey of domestic installers at the end of June revealed that order books stood at 12 weeks, which was up from 11.5 weeks a year earlier. Marshalls is also building its international business, principally in Belgium. And despite the subdued market background in mainland Europe, sales rose by 7 per cent in the first half, and now account for 6 per cent of group sales. Marshalls' Belgian business also benefited from restructuring last year, although this did cost £2m.
| MARSHALLS (MSLH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 319.5p | MARKET VALUE: | £637m | |
| TOUCH: | 319.25-321.5p | 12-MONTH HIGH: | 331p | LOW: 160p |
| FORWARD DIVIDEND YIELD: | 2.4% | FORWARD PE RATIO: | 18 | |
| NET ASSET VALUE: | 90p | NET DEBT: | 17% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 301 | 9.3 | 5.3 | 5.3 |
| 2013 | 307 | 13.0 | 7.2 | 5.3 |
| 2014 | 359 | 22.4 | 10.1 | 6.0 |
| 2015* | 396 | 32.6 | 13.3 | 6.8 |
| 2016* | 423 | 41.5 | 17.4 | 7.8 |
| % change | +7 | +27 | +31 | +14 |
Normal market size: 1,500 Matched bargain trading Beta: 0.46 *Numis forecasts, adjusted PTP and EPS figures Last IC view: Buy, 248p, 10 Mar 2015 | ||||
Product innovation is contributing to Marshalls' success. A typical example is an extension of its Drivesys driveway products with the launch of Pavesys, the patio version, which will be 50 per cent quicker to install, thus helping installers with lengthy order books. Further investment is being made in new products, notably 'intelligent street furniture'. This could include waste bins that can signal when they need emptying, and bollards with pedestrian information.
Marshalls has also made great strides in reducing net debt from £66m in 2012 to £30.5m in 2014. Part of this reduction was achieved from the sale of a number of non-core aggregate quarries to Breedon Aggregates (BREE) for £17.5m, although efficient cash control should help to reduce net debt still further to just £13m by 2016, according to Numis estimates.
Dividends were paid throughout the downturn and encouragingly started to rise again last year, although the yield on the shares remains relatively modest.
