Marlowe – continuing to make earnings enhancing acquisitions

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Marlowe – continuing to make earnings enhancing acquisitions
Master Investor Magazine

Master Investor Magazine Issue 58

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Operating in an attractive sector and generating some impressive growth, Marlowe is one to watch, writes Mark Watson-Mitchell. 

Just two weeks ago, when I highlighted the investment attractions of Sureserve ahead of its results, I pointed out that the compliance sector was one of growth.

Well, now I want to highlight another AIM company in the same sector – Marlowe (LON:MRL).

At the beginning of December, the company announced its adjusted results for the six months to end-September 2019 and they showed a 58% advance in both revenue and pre-tax profits.

This specialist services group is focused upon developing its subsidiary companies which assure the regulatory compliance and safety of UK businesses.

The company concentrates on fire protection, security systems, water treatment and air hygiene services – areas which are essential to its customers and controlled by loads of regulations.

Its customers can be found on most high streets, in office complexes, leisure facilities, manufacturing plants and industrial estates.

The list of over 17,000 clients includes FTSE 100 companies, multi-site NHS trusts, local authorities, SMEs and facilities management providers.

The group works with one in every eight UK businesses that employ more than 250 people.

Employees from group companies make a total of 1.5m service visits a year.

It employs over 2,000 people of which some 1,400 are compliance experts who are specialists in their field – ranging from compliance, risk assessors, auditors, technicians, engineers and employment lawyers.

Marlowe is all about growth – and, over the years, a lot of that has been through strategic value-enhancing acquisitions.

Since 2015 it has made about 35 targeted purchases, during which time the market cap has grown from just £5m to over £220m. And its management is gaining experience in bedding down and controlling the new purchases.

The company operates in robust markets which offer steady growth prospects.

Importantly though, the group has a strong recurring revenue base with customer relationships that have been built up over the years.

That revenue gives the company very attractive visibility of its future growth and creates a great cashflow.

As it expands the group is always looking to improve its operational and technological efficiency.

Revenues have trebled from £47m in 2017 to £128m last year. Brokers are going for £184m in the current year to end-March 2020 and then, very conservatively, just £202m next year and £212m in 2022.

During those years pre-tax profits have grown from £0.7m in 2017 to £2m last year, while current-year estimates suggest £12.5m, worth 22.5p in earnings per share.

Next year £15.5m is possible, worth 27p in earnings.

For the year to end-March 2022 some £17.1m pre-tax is anticipated, giving 30p of earnings.

And who better to recognise that growth potential than Alex Dacre, the group’s chief executive, who purchased more shares on Christmas Eve, paying an average 494p each, to take his holding up to 3,525,334, representing some 7.7% of Marlowe’s equity.

Other large holders include: Danske Bank (5.84%), Canaccord Genuity (5.45%), Royce & Associates (3.68%), Premier Miton (3.67%), Polar Capital (3.05%), Majedie Asset (2.70%), Allianz Global (2.51%), Royal London Asset (2.23%), and Threadneedle Asset Management (2.08%).

Another notable holder is Lord Michael Ashcroft with 11,877,361 shares, 25.89% of the issue.

With its shares currently trading at around the 468p level it puts them out on 21 times earnings, which on the face of it looks very expensive. However, given that it has market-leading strength as it is building up, that merits a premium rating.

I now set an end-2020 target price of 550p.

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