Marshalls' roofing business gives margins a lift

Marshalls (MSLH) seems happy with its “transformational” £535mn purchase of roof tile maker Marley so far.

The company reported a 17 per cent increase in revenue for the first half of 2022, which included two months’ worth of contribution from Marley. Like-for-like revenue was up 7 per cent.

Marley's operating margin of 24 per cent was also much higher than Marshalls' landscape and building products arms, where margins were 13.8 per cent and 13.6 per cent, respectively. Operating margin in the landscaping arm was squeezed by a slowdown in demand in the home improvement market, which makes up 20-25 per cent of group revenue.

Group-wide adjusted operating profit rose by 15 per cent to £48mn but on a statutory basis fell by 33 per cent to £27.3mn, mainly due to one-off acquisition costs. Net debt jumped to £252mn, from £41mn at year-end.

In May, we suggested that Marshalls could have overpaid for Marley, given that its £535mn offer was more than double the £238mn a company owned by private equity firm Inflexion paid for the business three years earlier.

The private equity owner made £160mn of revaluations after its purchase, including a £92mn uplift in the value of its brands and customer relationships. Marshalls now thinks they’re worth even more.

On top of the £228mn of intangible assets recognised on Marley’s balance sheet, Marshalls has recorded additional goodwill of £230mn in relation to its purchase. As a result, the level of intangible assets on the group’s balance sheet increased from £94mn in December to around £551mn at the end of June.

Ultimately, this is a subjective process and as Marshalls’ chief executive Martyn Coffey pointed out, the value of the business will be determined by its ability to generate cash.

In recent years, Marley has converted more than 80 per cent of its earnings before interest, depreciation, tax and amortisation into cash, he said. Its performance so far suggests that “that is going to carry on”.

Our concern remains about weakness in end markets and the heightened risk of a potential writedown to the carrying value of those intangible assets if it doesn’t.

The latest ONS data showed new orders in construction dropped by 10.4 per cent in the three months to June. In the same quarter, Begbies Traynor’s latest Red Flag report showed a 36 per cent increase in the number of construction companies showing signs of critical financial distress. This is a tricky market in which to pull off such a big-ticket deal. Sell.

Last IC View: Sell, 578p, 12 May 2022