50. Marlowe
There is no disguising the fact that health & safety (H&S) compliance, along with death and taxes, has become an inescapable part of modern life. This is why Marlowe (MRL) and its business model of providing a 'one-stop-shop' for companies’ H&S requirements has proved to be such a popular share – the price of which has nearly doubled since the pandemic ushered in a whole batch of new safety regulations across industries that previously operated with minimal, or at least very general, requirements.
The largest companies tend to have their own H&S departments, but there are a whole middle range of companies where the role is either carried out by an employee on a part-time basis (usually the person most prepared to wear a high-visibility jacket) or is farmed out to consultancies that specialise in advice and compliance. As a result, the market tends to be very fragmented, with often 'one-man-band' style consultancies advising small clusters of local businesses. Marlowe’s strategy has been to buy and consolidate consultancies under its umbrella through regular acquisitions to generate economies of scale.
The sum total is that Marlowe has been an exceptionally active acquirer over the past couple of years. Its most recent acquisitions, of UK- and Israel-based VinciWorks and UK-based Hydro-X, were bought for a combined total of £84m. The nature of the acquisitions illustrated how diverse Marlowe’s business model has become. For example, Vinciworks specialises in e-learning and compliance software, while Hydro-X was a direct competitor of Marlowe’s in the water treatment and air hygiene services sector. Margins, particularly in software and compliance, are higher than the rest of Marlowe’s business units. Over time the group margin should widen as the weighting of compliance software within the overall company increases, which should translate into a material improvement in Marlowe’s average five-year 5.3 per cent operating margin.
In the short term, the acquisitions are expected to contribute immediately to earnings and broker Berenberg upgraded its forecasts for 2023 by 14 per cent to give a new EPS of 46p. In current valuation terms, Marlowe trades on a hefty forward PE ratio for 2021 of 38 times Berenberg’s forecasts, the balance sheet looks broadly stable with a current ratio of 1.2, so further acquisitions should be relatively straightforward to finance, particularly as the free cash conversion rate has risen to an impressive 171 per cent. Buy. JH
49. FD Technologies
A name change earlier this year was not enough to fend off a torrid recent time in the markets for FD Technologies (FDP). The data analytics business suffered from largely stagnant sales in 2021, which combined with higher costs, helped to chop pre-tax profits last time. However, since then it has been a case of tweaking its business model to increase the proportion of recurring revenues it generates via subscriptions to its real-time, cloud-based, data analytics platform KX.
The technology focus inevitably means that FDP’s shares are highly rated, as investors have placed a long bet that the subscription service model will generate regular and more predictable revenue streams, plus higher profits, once marketing costs start to fall as a proportion of total sales. The shares rate at a hefty 76 times broker Investec’s estimates for 2022 and there would need to be more evidence that the strategy is working before abandoning a fundamentally cautious stance. Hold. JH
48. Johnson Service Group
Johnson Service Group (JSG) is a textile rental service. In the first half of 2020, £50.2m (40 per cent of total revenue) came from its hotel, restaurant and catering business. This took a big lockdown hit, with revenue in that division falling to £35.1m in the first half of this year. It is yet to bounce back to pre-pandemic levels, with activity only reaching 80 per cent of pre-Covid levels in August.
Workwear, which makes up the rest of the revenue, has seen a quicker return of demand because it is not dependent on the hospitality sector. By June, volumes had returned to 98 per cent of their pre-Covid-levels. With lots of the sales force on furlough and a reluctance of customers to change suppliers during the pandemic, the company's ability to win new business was impacted. Although a customer retention rate of 95 per cent shows it has been good keeping hold of the ones it has.
The issue now is rising wages. In the first half of the year it recruited 700 new employees but said that “the competition for labour in the employment market generally has resulted in increased costs of production”. Management says it is planning to offset wage inflation with price rises, but it may take some time as clients sign multi-year contracts. Rising costs and flat revenue aren’t a great combination. Sell. AS
47. Ergomed
The pandemic has been kind to pharmaceutical companies and Ergomed (ERGO) – a provider of drug development services – has thrived off their success. Since March 2020, the company’s share price has more than quadrupled and the first half of this year saw adjusted Ebitda rise by a third to £12.1m. The group’s cash balance also increased, while adjusted earnings rose by almost 50 per cent to 16.8p a share.
Ergomed is now seeking to bolster its international presence, with a particular focus on North America, where revenue shot up in the first half of 2021 following two acquisitions completed last year. The company has also opened an office in Japan, which it estimates is the world’s fourth-largest pharmaceutical market.
As a resemblance of normality returns, Ergomed’s growth shows little sign of slowing. Its order book stood at £229m at the end of June, more than 50 per cent higher than the previous year. Buy. JS
46. Mortgage Advice Bureau
The tedious British obsession with house prices has been magnified even further by the unprecedented level of mortgage completions – the highest in nearly 15 years – as Londoners abandoned the capital and fanned out to leafier regions in search of lockdown-proof space. This partly explains the 50 per cent rise in business that Mortgage Advice Bureau (MAB1) has enjoyed over the past 12 months. The group's product offering covers 12,000 products aimed at mortgage advice in the domestic housing and buy-to-let markets and is fully dependent on the number of approvals and completions.
Buying the shares is a basic proxy for taking a view on the UK housing market. Current predictions are that prices could continue to rise, as demand currently outstrips supply by some distance. Paradoxically, this may not bring much benefit to the group as it makes its commission based on the volume of mortgages approved, rather than on their overall value, so any constraint in supply might be a cause for investor concern. Hold. JH
45. Volex
The Volex (VLX) business has been through some dramatic changes throughout its near-130-year history. Even in the last 20 years, the electrical components producer has offloaded or closed plants in the UK and Ireland, moved its headquarters from the North West to Basingstoke (via a brief spell in London) and refocused its product range.
Volex is run by its biggest shareholder, financier Nat Rotschild, who holds a stake of over 24 per cent. It provides high-speed data transfer cables, power cables and cords used in data centres and plugs for electric vehicles and chargers.
It is also a much more profitable venture and has recycled gains to make acquisitions. Within the past couple of months, it has announced the $16.4m (£12.3m) acquisition of US-based printed circuit board assembler Irvine Electronics and a C$22.5m (£13.3m) deal for Prodamex and Terminal & Cable – a pair of businesses based in Mexico and Canada, respectively, that service the home appliance, defence and 'off-highway' markets.
Last week, the company announced a 45 per cent increase in revenue in the six months to 3 October of $293m, while pre-tax profit grew 35 per cent to $19.4m. Net debt excluding leases grew to $21.8m, compared with net cash of $7.2m on 4 April, as it beefed up stock levels to support growth amid ongoing supply chain disruptions. Net debt is likely to rise to $35m once the recently announced acquisitions complete. These will give the company a stronger foothold in North America as it continues to expand existing factories and buy competitors to serve demand in its main markets, none of which seem to be slowing down. According to FactSet, Volex also seems to be undervalued compared with its peers. Buy. MR
44. Strix
Strix (KETL) shares have more than doubled since listing on Aim in 2017. Forecasts of significant future growth for the kettle safety control and water heating component manufacturer continue to heat up investor interest. Encouragingly, ambitious growth targets are being met, helped by the acquisition of Italian home appliance company LAICA.
Management has a medium-term goal of doubling revenues by 2025, which it hopes to achieve “primarily through organic growth in water and appliance categories”. Growth plans will be helped by a new factory in Guangzhou which has doubled manufacturing capacity. Based on revenues of £95m for fiscal year 2020, the group could feasibly generate £200m in sales on the planned trajectory.
First-half results suggest progress is on track. Strix revealed robust figures against pre-pandemic comparators: revenues of £55m were up 25 per cent on 2019, while pre-tax profit climbed 13 per cent to £13m. The acquisition of LAICA also helped the top line, as the brand saw more than 20 per cent revenue growth in the period, contributed £10m of sales, and is expected to grow further.
New product launches in Strix’s domestic appliances offering are also cause for optimism. The Aurora water station was launched in the UK over the summer and an international launch is expected shortly, while the Dual Flo kettle offers one-cup capability – like a high-end coffee machine – and is launching in several global locations. Management aims for the products to “cement Strix’s position as the go-to technology partner for instant flow heater technology”.
Despite the strong outlook, chief executive Mark Bartlett and chief financial officer Raudres Wong recently sold significant amounts of stock, disposing of £3.6m and £1.6m worth of shares, respectively. The company said the sales were made “in light of the crystallisation of personal tax liabilities relating to company options and property investments”, but investors could be forgiven for questioning the timing.
Peel Hunt expects earnings per share to grow steadily to 17.4p by 2023, if Strix delivers on its growth plans. Although the company has not been immune from global supply chain disruption, it benefits from the concentration of its supplies in China and is delivering against ambitious growth plans. Buy. CA
43. Greencoat Renewables
A lack of wind seems to have dominated the headlines over the past few months as the UK grapples with a looming energy crunch this winter. In Scotland, for example, which relies heavily on on-shore wind, the summer shortage is estimated to have cut the equivalent of 0.2 per cent from in-land GDP.
For the most part, though, this does not seem to have affected Greencoat Renewables (GRP) as the Ireland-based company invests in renewable energy projects, rather than operate them. However, the market has consistently marked the shares down over the past 12 months and the shares now trade at a one-year low.
A windy winter will likely improve everyone’s mood around wind power, so sentiment could also come back as the valuation of Greencoat’s underlying investments increases. On a pure valuation basis, the shares trade at a 18 per cent premium to net asset value, which doesn’t really put them in value territory yet, despite the consistent fall in the share price. One for the watchlist. Hold. JH
42. Caretech
Intuitively you would think that CareTech (CTH), a provider of social care services, might have suffered major upheaval to its business model because of the virus. In the event, only a relatively small proportion of the 5,000 adults and children who use its services were deemed ‘high risk’ by the NHS. Management and shareholders alike would have been relieved by that determination and the group was able to recently update the market on double-digit revenue and cash profit growth for its financial year to September.
The group revealed occupancy levels in the mature estate were broadly flat at 80 per cent by the period-end, while blended occupancy fell from 81 to 78 per cent in the second half. However, it may be that staff numbers will present more of a near-term headache. The annualised staff retention rate has fallen by five percentage points to 71 per cent and the group notes a “reduction in applications and a higher rate of attrition leading to recruitment challenges”. Given this is an industry-wide issue, it may prove difficult to resolve. Hold. MR
41. dotDigital
Covid-19 could have had a disastrous effect on global advertising. However, with more of us glued to our screens than ever, digital marketing has shown impressive resilience. One closely-watched study expects this year to set a record for company spending.
dotDigital (DOTD), which provides companies with marketing automation tools, is already reaping the rewards. Adjusted Ebitda for 2021 has risen by 9 per cent to £19.8m, and the company has proposed a final dividend of 0.86p per ordinary share, up from 0.83p the previous year. Dotdigital’s subscription model means that recurring revenue is particularly important to future growth. Repeat custom remained steady at 93 per cent of total revenues in the year to June, while average revenue per customer grew 16 per cent to around £1,251 per month.
As companies seek increasingly sophisticated ways to target their customers, dotDigital is boosting the number of its customers using its so-called enhanced functionality features, an important upselling opportunity. The company's diverse client base should also act as a buffer if certain industries are forced to tighten their marketing belt in the wake of the pandemic. Buy. JS
