Concrete foundations supporting growth

Marshalls 5 November 2015 QuickView

Marshalls

Concrete foundations supporting growth

Construction & materials

QuickView

6 November 2015

Price

340p

Market cap

£678m

Share price graph

Share details

Code

MSLH

Listing

LSE

Shares in issue

199.4m

Business description

Marshalls is the UK's leading manufacturer of superior natural stone and innovative concrete hard landscaping products, supplying the construction, home improvement and landscape markets. Marshalls operates its own quarries and manufacturing sites throughout the UK, and has a national network of distribution sites. A small International division (c 5% of revenues) is based in Belgium.

Bull

Leading UK brand and market position.

Operational gearing into an upturn.

Margin potential above consensus estimates.

Bear

RMI market improving but still patchy in places.

Greater competition in commodity products.

Material pension liabilities but modest scheme surplus (at June) and no recovery cash contributions required.

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

A site visit reaffirmed Marshalls’ business strengths and highlighted a focus on product/service innovation and margin discipline. The company is well positioned and its coherent business strategy looks set to deliver a strong three-year earnings uplift, with scope for this to be ahead of current market expectations.

Differentiation is key

Marshalls is a B2B supplier of landscaping products with a leading premium brand in both commercial/public sector (two-thirds of revenue) and domestic/residential market segments. Differentiation through product range, customer support and service are key drivers of market position and Marshalls innovates in each of these areas to reinforce its competitive strengths. New and faster-to-install systems, earlier engagement with project specifiers and homeowners and balancing third-party distribution with direct-to-site delivery (using its own vehicle fleet) are all examples of this. Marshalls’ marketing approach targets specifiers, installers and merchants as well as end customers to reinforce brand preference, pulling through products and supporting price and margin. It uses a highly-developed bespoke CRM platform through which identified leads in both market segments are rigorously tracked, maintaining robust margin discipline at project and group levels.

Significant recovery expected, but could be greater

Consensus estimates already factor in a significant profit recovery for Marshalls, with EBIT returning to 2007 levels by 2017 and a 2014-17 EPS CAGR of c 27%. Operational gearing from increasing in volume is an obvious driver here. We note that FY17 revenue estimates are over £50m (or c 14%) above 2007 levels, which suggests more conservative margin expectations. A stronger commercial and pricing environment together with a growing contribution from specialist activities (such as street furniture and mortar) now under the Marshalls brand umbrella could also contribute to margin expansion. Additionally, with a conservatively geared balance sheet, Marshalls could boost growth through complementary acquisitions.

Valuation: The price for growth

The 23 October IMS confirmed that trading has been in line with management expectations and after a strong run extending back to the beginning of 2013, Marshalls’ share price is close to its 2007 high. Hence, growth is priced in but, with reasons to believe that the rate of progress could be greater, the apparent FY17 P/E of 16x may turn out to be somewhat lower in reality.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

358.5

22.4

10.1

6.0

33.7

1.8

12/15e

398.0

34.0

14.2

6.9

23.9

2.0

12/16e

429.6

42.5

17.4

8.7

19.5

2.6

12/17e

459.8

49.7

20.7

10.1

16.4

3.0

Source: Company reports, Bloomberg

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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