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Marlowe looks to buy growth

The health & safety compliance business continues with its growth by acquisition policy
December 1, 2021
  • Looks to software to improve its margins
  • Some improvement in cash conversion

A dizzying run of acquisitions - some 64 over the past few years and 19 since February - muddies a clear view of the underlying performance of health and safety compliance specialist Marlowe (MRL), not least because multiple deals have meant regular fundraising via bank debt facilities and share sales. The latest of these was a £50m October equity placing, in part to fund the £25m acquisition of EssentialSkillz, a provider of a leading provider of eLearning and compliance software.

The latter deal carries strategic weight. Hopes for expanding margins depend on how quickly software sales can grow as a proportion of total revenue, given the division comes with consistently higher margins than straightforward consulting. In results for the half-year to September, annual recurring software revenues hit £35m.

At the same time, management claimed a 3 percentage point improvement in the cash profit margin to 17.8 per cent, mainly through integrating the HR, Law and Safety business. There were also signs that cash conversion is starting to improve, not least because debtor days have dropped significantly to 52 so far this financial year - though a positive effect on company payment times from exiting the worst of the pandemic should also be noted.

Marlowe is an interesting proposition, particularly as its underlying market is fragmented and most competitors lack any real scale. That is a clear market opportunity but building it will not be cheap. What's more, increasing balance sheet leverage over the last few years has led to a steady drop in the current ratio - which could hamper the group's ability to meet short-term liabilities.

Broker Berenberg forecasts earnings of 37p and 46p for 2022 and 2023, giving price/earnings forecasts of 25 and 20, respectively. That looks like good relative value. Buy.

Last IC View: Buy, 527p, 8 July 2020

MARLOWE (MRL)   
ORD PRICE:930pMARKET VALUE:£769m
TOUCH:926-940p12-MONTH HIGH:974pLOW: 556p
DIVIDEND YIELD:NILPE RATIO:N/A
NET ASSET VALUE:322p*NET DEBT:

23%

Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202083.30.60.8nil
20211351.61.7nil
% change+62+167+113-
Ex-div:n/a   
Payment:n/a   
*Includes intangible assets of £337m, or 408p a share