Marlowe PLC (LON: MRL)

Marlowe PLC is an FTSE AIM All-Share Index listed specialist services company. MRL was founded in 2015 and has its headquarter in London, the United Kingdom. It assures regulatory compliance and safety to its clients by offering services and software. The Company is focused on sectors that are expected to have attractive long-term, structural and non-cyclical growth. MRL has two divisions: Testing Inspection & Certification and Governance, Risk & Compliance. MRL offers risk and compliance software services, air hygiene, water treatment, health and safety services in the United Kingdom. Its customers include FTSE listed companies, plants and industrial estates, leisure facilities, SMEs, facilities management providers, local authorities, etc.

The UK Services Purchasing Managers Index (PMI)

In the latest release on 4 August 2021, the UK Purchasing Managers Index (PMI) for services had a reading of 59.6, which indicates expansion in the sector. Hence, MRL could use this positive momentum to drive its growth as it strives to achieve its medium-term target of high single-digit growth across its Testing Inspection & Certification (TIC) and Governance, Risk & Compliance (GRC) divisions.

Growth Prospects

• Acquisitive growth: MRL completed fifteen acquisitions during FY2021. In FY2022, so far, MRL has completed eight acquisitions, including the recent acquisitions of Barbour Environment, Health and Safety and Core Stream Limited. These acquisitions strengthen MRL’s presence in key markets.
• High percentage of recurring revenue: A very high percentage of the Company’s revenues are recurring in nature, offering the Company a resilient platform for growth. Currently, around 83% of its 12-month run rate revenues are recurring in nature.
• Exposure to a wide spectrum of customers and industries: The Company offers end-to-end compliance solutions to a broad range of customers. Its customers include airports, large national organisations, leading universities, property managers, FTSE listed companies, SMEs, schools, food processing sites, etc. This diversification offers MRL protection from economic downturns.
• Regulated markets and business-critical services: The Company offers business-critical services and software, which are vital to the well-being of its customers. Hence, these services are non-discretionary and insulated from changes in macroeconomic trends. Also, the sectors MRL serves are governed by stringent regulations.

Key Risks 

• Failure to achieve desired synergies: Any failure to achieve expected synergies from the acquisitions could impact both revenue and cost for MRL.
• Reputational risk: The industry in which MRL operates demands a high level of integrity, with client trust being the most important aspect. Hence, the Company is vulnerable to adverse market perceptions if it fails to satisfy its responsibilities to its clients.
• Changes in the regulatory environment: There could be material changes in the regulatory environment surrounding the markets MRL serves. Failure or delay in adapting effectively could lead to significant cost incurrence.
• Covid-19 disruptions: There could be disruptions in the operations of the Company due to the spread of the delta-variant of Covid-19 in the UK, increasing its costs.
  

Now we will analyse some key fundamental and shareholders statistics of Marlowe PLC.

Recent Development 

Marlowe abandons the acquisition plan for Restore: On 10 August 2021, it came to light that MRL had dropped its takeover plan of Restore Plc, as it believed that a deal in the best interests of its shareholders could not be reached.

Financial and Operational Highlights (for the year ended 31 March 2021 as of 23 June 2021)

(Source: LSE Website) 

• MRL completed fifteen acquisitions during FY2021. The acquisitions helped in the Company’s solid strategic and operational progress.
• The Company has established a new divisional structure during FY2021. Currently, it has two divisions: Governance, Risk & Compliance (GRC) and Testing Inspection & Certification (TIC).
• Driven by the acquisitions and MRL’s resilient platform for growth, the Company achieved a 15% YoY surge in revenue. Also, around 83% of its current 12-month run rate revenues are recurring in nature.
• The strong performance in top-line resulted in adjusted EBITDA rising 30% YoY and adjusted EPS surging 6% YoY in FY2021.
• The Company has improved its cash-accretive operations in FY2021. It led to an underlying cash conversion of 110% in FY2021 from 83% in FY2020.
• It resulted in a strong balance sheet for the Company, with net cash of £43.3 million in FY2021 from net debt of £32.3 million in FY2020.

Financial Ratios (H2 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 17 August 2021, at 7:10 AM GMT, MRL’s shares were trading at GBX 806.65, up by 0.33% against the previous day closing price. Stock 52-week High and Low were GBX 909.75 and GBX 504.00, respectively.

On a daily chart, MRL's price is sustaining above 20-day EMA of about GBX 799.30 and 20-day SMA of about GBX 787.43, indicating the possibility of an upward movement.

In the last three months, MRL’s stock has delivered a decent positive return of ~7.20%. Also, it has outperformed the FTSE AIM All-Share Industrial Goods and Services index with a return of about 5.63% and the FTSE AIM All-Share index with a return of about 2.11%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

MRL delivered a strong performance in FY2021, driven by the acquisitions and MRL’s resilient platform for growth. Revenue was up 15% YoY, and profit before tax rose 31% YoY in FY2021. The management focuses on more than 90% cash conversion by the end of FY2024. The Company has made eight acquisitions so far in FY2022, and it has a strong pipeline of potentially attractive acquisitions. The Company could benefit from its acquisitive growth, a high percentage of recurring revenue, exposure to a wide spectrum of customers and industries, and its operations in regulated markets and business-critical service offerings going into FY2022. The management is confident that the Company would deepen its market share across the sectors it operates by FY2024.

Considering the Company’s acquisitive growth prospects, its high percentage of recurring revenues, its high cash conversion, the better liquidity and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Marlowe Plc at the current price of GBX 806.65 (as on 17 August 2021 at 7:10 AM GMT), with lower-double digit upside potential based on 27.56x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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