Marshalls (MSLH) manufactures and sells a wide range of materials for the construction and home improvement markets, and has made steady progress in working towards its 2020 strategy of delivering a sector-beating performance and increasing its market share. This is being achieved through a measure of self-help, investment in new product lines and a selective programme of bolt-on acquisitions.
- Significant operational gearing
- Strong order book
- Well financed
- Growing return on capital
- Vulnerable to a downturn in consumer sentiment
- Commercial sector growth still modest
The sensitivity of profits to change in turnover makes Marshalls' strategy all the more attractive. Indeed, while turnover in 2016 grew by just 3 per cent, pre-tax profits were up by 31 per cent. This, in part, reflects an impressive record on capital discipline that has seen debt gearing improve from 20.3 per cent in 2013 to a net cash position at the end of 2016. The business model, with its broadly fixed cost base, throws off a lot of cash, and as well as reducing debt this has been used to fund investment in new products. Rising profitability also means the return on capital employed has steadily risen, from 8.1 per cent in 2013 to 23 per cent in 2016.
And the trend has continued into 2017, assisted by a number of favourable developments that have boosted the domestic side of the business. Accounting for around a third of group turnover, this business is booming, thanks in part to a slowdown in transactional volume in higher priced houses - a key part of its market - prompting more home improvement and extension activity. Further business has been generated as more retired people take advantage of new pension freedoms that allow funds to be withdrawn and spent on home improvements. In the first four months of 2017, sales on the domestic side grew by 13 per cent, and installer order books rose to an all-time high at 12.7 weeks.
| MARSHALLS (MSLH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 408p | MARKET VALUE: | £806m | |
| TOUCH: | 407.9-408.6p | 12-MONTH HIGH: | 415p | LOW: 199p |
| FORWARD DIVIDEND YIELD: | 2.5% | FORWARD PE RATIO: | 20 | |
| NET ASSET VALUE: | 109p | NET CASH: | £5.4m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p)** | Dividend per share (p)* |
|---|---|---|---|---|
| 2014 | 359 | 22.4 | 10.1 | 6.0 |
| 2015 | 386 | 35.3 | 14.3 | 7.0 |
| 2016 | 397 | 46.0 | 18.9 | 8.7 |
| 2017** | 416 | 50.3 | 20.7 | 10.4 |
| 2018** | 424 | 52.5 | 21.7 | 11.7 |
| % change | +2 | +4 | +5 | +5 |
Normal market size: 1,000 Matched bargain trading Beta: 0.11 *Numis forecasts, adjusted EPS and PTP figures, DPS excludes special dividends of 2p a share in 2015 and 3p in 2016 | ||||
The public sector and commercial end market, which account for two-thirds of group turnover, grew a more modest 2 per cent during the first four months of 2017, although this is an improvement on a relatively flat 2016. As well as taking a larger share of the market, Marshalls has focused on those parts of the market seen as offering higher levels of growth. These include water management, rail and housing construction, where order intake has been strong. Products on offer, apart from paving, include kerbs that allow for water dispersal, traffic calming and street furniture. And prospects for the coming year are relatively bright. According to the Construction Products Association, its spring forecast is for growth in UK market volumes of 1.3 per cent, a slight improvement on the winter forecast.
Inevitably, domestic sales are tied to some extent to the general feelgood factor. So any sustained deterioration in consumer confidence could have a detrimental effect on sales. On the commercial side, trading is vulnerable to any economic downturn or change of direction in spending on infrastructure, although the climate appears to be relatively robust at present.
In the current year, Marshalls is planning for capital expenditure of £20m, of which around £6m will be to improve operational efficiency through further self-help measures. The balance will be used for research and new product development. Bolt-on acquisitions remain a part of Marshalls' expansion strategy, although given current market uncertainty ahead of the general election and progress towards leaving the EU, the group is adopting a cautious approach.
