Marshalls' Marley bet has yet to pay off

In last week’s cover story on companies using acquisitions for growth, Cenkos Securities' head of growth companies research Peter Renton said one way of assessing whether a deal had done well is to aggregate the cash profit of the acquirer and the target, then check back the following year to assess how it had grown.

Looking at Marshalls’ (MSLH) results eight months after its £535mn acquisition of Marley, the answer is not so well – although admittedly it's early days. The company said its revenue, operating profit and earnings per share were all higher on an adjusted basis but this was after some pretty hefty alterations.

Marshalls’ reported cash profit in 2021 was £107mn and it acquired a business in Marley that generated £49.5mn in the same year. Even if you shave a third of that off to account for eight months of ownership, the cash profit figure of £90.2mn for 2022 is disappointing. Basic EPS (on an enlarged share base) fell by almost 60 per cent and return on capital employed dropped to 6.4 per cent, from 20.6 per cent.

The issue is mainly Marshalls' landscape products arm (55 per cent of group revenue), where sales and profit were hit by declining volumes in both new build and home improvement markets. The entire group has exposure to these, though, and volumes continue to fall – like-for-like revenue contracted by 10 per cent in January and February.

Yet although end markets remain shaky, the decline since last April’s placing means Marshalls' shares are more reasonably priced at 10.5 times Shore Capital’s forecast earnings of 28.5p – well below their 10-year average of 15 times. Move to hold.

Last IC View: Sell, 444p, 18 Aug 2022