MRL: Share proposal

Marlowe (LSE:MRL) is an example of an investment proposal submitted to the club using the  "Light touch proposals" in free format.

  

 

 

Introduction

The MRL report here  is an example of an investment proposal received by the club in May 2019. Marlowe (LSE:MRL)  was submitted to all members prior to the May 2019 monthly meeting. This proposal is an instance of the "Light touch proposals" in a free format.

Members would then have a chance to review the MRL submission. At the meeting, the proposer presents the share, followed by an extensive session of Q&As. The club may then go through the voting process to decide whether to buy (invest), not buy, postpone the decision, opt for a conditional buy or other decisions. 

Members normally submit proposals using their own/preferred investment strategy and approach. MRL was proposed under the "growth" investment objective, using a combination of fundamental and technical analysis (TA) as investment strategy. At any one time, the club would have adopted a preferred method & templates for proposals (see here for the various methods the club adopted over time).

MRL was voted as a buy in May 2019, bought in June 2019 at 423.55p  a share; it is still an entry in the Mobius portfolio (at the time of writing in January 2022).

The entry below is the document as submitted by the proposer (as a PDF document):


 The investment case  (May 2019)

This stock recommendation is for the Mobius Watchlist, it  comes via selection/filter  from the last six months worth of the weekly  Shares magazine “big ideas & big ideas updates” sections. 

    • MRL is a fast growing company in the midst of acquisitions & integrations in a vital segment of the economy

    • A ~£179M market cap, AIM companies that specialises in E2E compliance, certification in two divisions “fire & security” and “air & water”.

Meet the company   

    • Marlowe plc is a UK leader in specialist services which assure safety and regulatory compliance, whilst managing risk for businesses across the country.

    • The company was formed to create sustainable shareholder value through the acquisition and development of businesses that provide regulated inspection, testing and compliance services. Our group has a core focus on health & safety, fire safety, security, water safety, water treatment, air quality and environmental services – all of which are vital to the wellbeing of our customers operations and are invariably governed by regulation.

    • MRL is  organised into two Operating Divisions, consisting of a number of leading businesses which provide technology-enabled services across five main regulated safety sectors.

    • MRL provides a range of closely related regulated testing, inspection & compliance services each of which is delivered by one of our specialist divisions

    • >> They have a comprehensive End2end  five phase methodology from acquisition to integration and the management team have done it successfully before (see link the Marlowe model)

Some facts

  • ~£179M market cap, industry/sector: industrials (business support services),net gearing of 32%, turnover in 2017/2018 of £47/82M and expected in £120-150M mark for 2019. Most of the cashflow is for acquisitions. EBITDA is used as opposed to EPS/profit ~£8-10M. 

  • Current 12 month run-rate revenues ~ £150M, with 75% recurring revenues, 80% cash conversion, 15% ROCE, and ~12000 clients (source: their website). It floated on AIM ~2016.

  • CAGR (compound annual growth rate over 3 years) of revenue/EBITDA/adjusted EPS is 60%/63%/32%

  • Clear growth of revenue

  • Most of the debts and (debt facility) are for acquisitions. In 29/04/19 update: “The company completed eight acquisitions in the year across all key disciplines within its two divisions and made one non-core divestment.'The integrations of all acquisitions made during the year are progressing well and our acquisition pipeline remains strong,' Marlowe added. ”

What I liked

  • Important area (compliance) essential for all businesses.

  • Provided E2E solution.

  • Good model of acquisition & organic growth

  • Clear & focussed strategy - core

  • Easy to understand

  • Growth story with great potential

  • Director Alex Dacre CEO has 9% of shares - Lord M. Ashcroft (30%). Management team seem to really know what they are doing.  

  •  Strong management team

  • In my simple (conservative) estimate/calculation: 

    • On a 18 multiple share price should be ~ 4.6 for this year and 6.1 next year ; a respective uplift of 7% and 41%.  The 29/04/19 trading update stated that “EBITDA to be slightly ahead of current market expectations.” Assuming  this year may come in at 12m adjusted EBITDA which on a  18 multiple is an share price of  5.2, an uplift of 21%.   

    • Current market cap £179M, share price £4.3, and with  the 2019 forecast 10.6m adjusted EBITDA, 2020 forecast 14m adjusted EBITDA. 

  • MRL own version of the investment case in Marlow:
    • Robust markets with steady growth prospects
    • Growth through value-enhancing M&A and integration
    • Long customer relationships, annuity-type recurring revenues with good future visibility
    • Operational & technology improvement
    • Growing barriers to entry

My concerns or remaining questions

  • Still a bit difficult  to do an intrinsic valuation (for value investors), given the   level of acquisitions in the pipelines, borrowing. I am using PSR (Price Sales ratio) and EBITDA as guidelines for valuation. A good PSR and EBITDA for the current market cap.

  • Share price has already appreciated a fair bit.

  • I can’t use PE at this stage for valuation,  early years where most of the energy is on acquisitions & integrations (as per model)  

 

Latest updates & news

    • Bullish trading update 29/04/19: Revenue for the year through March 2019 rose 62% to around £130m, reflecting contributions from both acquisitions and organic growth.

Recommendations, analysis

    • I would buy this stock now  on a good growth story that can go very far - medium risk, as the valuation is still not straightforward, and the integration of a pipeline of companies need to be shown to continue to work (they need to (continue to) prove they can manage to integrate & sustain these acquisitions in harmony to deliver E2E solutions).

    • Marlowe intends to publish its full year results for the year ended 31 March 2019 on 18 June 2019.

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Last updated July 2022. © Mourad KaraDisclaimers