Marshalls — Attractive returns

Marshalls — Attractive returns

Improved operating margins, free cash flow and group ROCE were all standout features of FY16 performance. Management is investing in the key business drivers to further enhance Marshalls’ market position under a well-executed strategy and underpin expectations of further progress.

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Marshalls

Attractive returns

Construction & materials

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20 March 2017

Price

352.6p

Market cap

£703m

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. Commercial/public sector accounted for 64% of FY16 revenue, domestic/residential 31% and a small international division based in Belgium the remaining 5%.

Bull

Leading UK brand and market position.

Integrated manufacturing and distribution service model.

Attractive returns and cash generation.

Bear

UK residential RMI spending still relatively subdued.

Commercial outlook flat; infrastructure/public sector more encouraging (especially rail, highways).

International operations less well developed.

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Improved operating margins, free cash flow and group ROCE were all standout features of FY16 performance. Management is investing in the key business drivers to further enhance Marshalls’ market position under a well-executed strategy and underpin expectations of further progress.

Strong returns and cash flow performance

In FY16, PBT, EPS and total DPS all rose by c 30% y-o-y, a very strong outturn in the context of a 3% revenue uplift (domestic/residential +10%, commercial/public sector was flat). Management continues to focus on the business differentiators (ie brand, range, service) to generate above market growth and drive margins ahead (improving business mix, product development, operational efficiency). Working capital – especially inventory – discipline has been a recurring feature. FY16 ROCE reached 23% with Marshalls ending the year in a net cash position. Planned increases in investment in plant and new product development are designed to sustain these financial characteristics and keep evolving the customer proposition.

Ten years on: A better, more resilient business

We note that Marshalls’ revenue, PBT, EPS and share price are all currently around 2006/07 levels. Marshalls today has higher commercial/public sector revenue, with domestic around one-third lower (from a broadly even position 10 years ago) and the company goes to market under a single unified brand now. The in-house distribution model is a common thread but new product development activity appears to have greater prominence now. At the corporate level, Marshalls is debt free and no additional cash calls into the DB pension scheme are required. Taken together with some positive long-term trends (in new house building, roads, rail and water management) with more to come from the domestic sub-sector, we believe that the company has better quality earnings, greater resilience and, under the 2020 Strategy, a clear intent to continue to grow profitability.

Valuation: Premium record warrants premium rating

Marshalls’ share price has travelled well from 2012 lows. That said, even with a positive response to the FY16 results, it has only just regained the level of a year ago. It remains one of the highest valued stocks in the sector but we believe that the developing financial record warrants a premium rating. The business is well positioned to continue to progress without relying on more buoyant markets to achieve this. Marshalls is set to deliver good earnings and dividend growth; cash credentials offer the potential for both to be enhanced further.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

386.2

35.3

14.1

9.0*

25.0

2.6*

12/16

396.9

46.0

18.6

11.7*

19.0

3.3*

12/17e

413.4

48.5

19.8

10.8

17.8

3.1

12/18e

431.7

53.2

21.7

12.2

16.2

3.5

Source: Bloomberg. * Includes supplementary DPS (2.0p in 2015; 3.0p in 2016, payable with 5.8p final).

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Focusrite — Right focus

Focusrite has positioned itself in a way that makes its shares a particularly attractive investment: leadership in a niche product area protected from general consumer swings; an international market structure that makes it relatively currency agnostic; a habit of profit over delivery; a strong and further strengthening balance sheet; and an undemanding valuation. This first half trading statement confirms every one of those points.

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