Marlowe boosts cash conversion rate

Marlowe (MRL) delivered a 36 per cent increase in gross profit through FY 2023, but the £189mn generated was almost wiped out by a combination of rising administration, acquisition, and restructuring costs, together with an increased amortisation charge and a negative fair value adjustment. And despite a steep rise in revenues, the underlying margin, although healthy enough at 40.6 per cent, was down on the 2022 comparator.

However, once you strip out non-core charges, the group cash profits were 52 per cent to the good at £82.7mn, with the underlying margin up by 30 basis points to 19 per cent ex central costs. The safety and regulatory compliance specialist also surpassed its target of generating £500mnn run-rate revenue by the end of FY 2024 and is on target to beat its cash profit expectations.

The full-year figures may go some way to reassuring investors, important given that the shares have lost over a fifth of their value over the past 12 months. Indeed, the divergence between adjusted and reported earnings – as noted above – may have driven uncertainties. They may also find reassurance in the pronounced rise in net operating cash flow and the fact that the rate of free cash flow conversion increased markedly as the year progressed.

Net debt crept up through the period due to the payment of a deferred consideration from a prior acquisition, together with a £9mn outlay relating to the deal to acquire PCS Consultancy in February 2023. Net debt as a proportion of cash profits stood at a multiple of 1.9 at the period, but analysts at Panmure Gordon anticipate that the ratio will narrow to 1.1 times by March 2025 on the back of improved free cash flow generation.

The group’s shares were on the rise midway through June after Sky News reported that Marlowe was exploring the sale of its testing, inspection, and certification division, the value of which was touted in the region of £650mn. The strategic rationale is by no means clear given that the business generated 58 per cent of revenue at the period end.

The shares now change hands at 12 times Panmure Gordon's forward EPS estimate, while the enterprise/cash profit multiple is expected to narrow appreciably through to 2026, suggesting that the company may be undervalued. We anticipate that restructuring and integration expenses will dissipate through this year, short of any further M&A activity. With cash flow efficiencies on the rise, we reiterate our earlier advice. Buy.

Last IC View: Buy, 830p, 28 Jun 2022