Marshalls – QuickView

FY12 was a rearguard action for Marshalls plc (MSLH.L), having faced a confluence of weak markets and wet weather. Actions taken arrested the profit decline in H2 and brought cash benefits to lower borrowings. Net debt looks set to reduce further in FY13 but profits need to double before cover ratios become more comfortable. Marshalls’ model has the potential to deliver this, although not in FY13.

Coping with headwinds and rain
Management deserves credit for maintaining and meeting guidance over the concluding months of FY12. Despite a 9.4% revenue decline in H2, underlying profit matched its prior year equivalent. Restructuring actions were substantially announced at the interim stage and had a net cash positive impact (£11.4m) from a range of sources. This drove net debt reduction (from £77m to £64m) in FY12 and there is more to come in FY13, with a further projected c £5m profit improvement and £5m inventory reduction. With EBITDA rising (from c £29m in FY12) and further net cash inflow probable, net debt/ EBITDA should be 2x or less at the end of FY13.

Positioned for the near term, capacity for the upturn
Leading indicators suggest Public Sector and Commercial work (64% of sales) will trend lower in H113 but see some recovery in H2 (echoed by Travis Perkins). Large housebuilder demand seems to be healthy currently and Marshalls’ Domestic installer orders are ahead y-o-y (similar to Q111) though consumer confidence is still fragile. The market backdrop is set to remain unhelpful but restructuring benefits (c £4m) are expected to flow through in the UK with expansion to come from a new European operation (c 5% sales). In the longer term management has stated that the current UK production footprint could deliver a 25% uplift in revenue without the need for expansionary capex.

Valuation: Anticipating recovery
After a decent run, the current rating (FY13 P/E c 20x, EV/EBITDA c 9x) looks full compared to the current market outlook and the balance of risk is more to the downside. That is not to ignore the potential of the business model to deliver a sharp profit increase when volume growth returns. Though the cover is a thin 1.1x (c 2x on an underlying cash basis), Marshalls is currently yielding 4.8%.

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