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’ (LON:MSLH)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.
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