As companies face an ever-growing mountain of regulatory compliance requirements, Marlowe (MRL) is capitalising on the need to outsource these essential and increasingly complex obligations. Presenting itself as a one-stop shop, the group provides regulated inspection, testing and compliance services across four specialist sectors – health and safety, fire safety and security, water treatment and air quality. Tapping into addressable markets said to be worth more than £4bn in total, it has grown rapidly through acquisition since 2017.
Fragmented market
Cross-selling opportunities
Focus on non-discretionary services
Sticky customers
Integration risk
Low margins
On the back of eight acquisitions in 2019, revenue jumped by 59 per cent to £129m, translating to a 53 per cent surge in adjusted cash profits to £11m. With the £33m purchase of William Martin, its leading software-as-a-service platform has been given a foothold in the fast-growing technology-enabled commercial property health and safety market.
Acquisitions have initially lowered underlying cash profit (Ebitda) margins from 8.9 per cent to 8.6 per cent. However, in boosting network size and route density (the ability to service multiple customers in close proximity), margins are expected to expand once acquisitions are integrated.
With acquisitions enabling the group to reach 'critical mass', cross-selling services across divisions should see a pick-up in organic growth, building on the estimated 5 per cent achieved in 2019. Some 20 per cent of sales last year came from customers taking more than one service. The mission-critical nature of services and inconvenience of switching providers result in customer ‘stickiness’ – the average customer relationship is over 10 years with retention rates exceeding 95 per cent in some divisions, while about three-quarters of sales are classed as recurring.
Heavy acquisition activity has catapulted net debt from £2.9m to £20.1m but following a £20m share placing at 426p in June, pro-forma net debt fell to less than one times cash profits. A three-year £30m revolving facility secured in 2018 and a £15m accordion facility should help fund future bolt-on deals. Meanwhile, a 63 per cent increase in net cash generated from operations to £5.2m reflects an underlying conversion ratio to adjusted operating profit of 83 per cent.
MARLOWE (MRL) | |||||
ORD PRICE: | 405p | MARKET VALUE: | £186m | ||
TOUCH: | 405-407p | 12-MONTH HIGH: | 570p | LOW: | 340p |
FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 16 | ||
NET ASSET VALUE: | 190p* | NET DEBT: | 26% |
Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) | |
2017 | 47 | 3.3 | 10.3 | nil | |
2018 | 81 | 5.8 | 13.4 | nil | |
2019 | 129 | 8.9 | 17.9 | nil | |
2020** | 172 | 12.4 | 21.6 | nil | |
2021** | 180 | 14.4 | 26.0 | nil | |
% change | +5 | +16 | +20 | - | |
Normal market size: | 1,000 | ||||
Beta: | 0.78 | ||||
*Includes intangibles of £90m, or 220p a share | |||||
**Cenkos forecasts, adjusted EPS and PTP figures |