Marshalls Plc (MSLH) Business, competition, growth prospects

[TheMotorcycleBoy]

Hi,

I've been doing some more research on MSLH. One of the reasons being that back over here I was wondering whether to topslice them when they were 585p (we bought two holdings in 2018, one in March @449p and one in December @421p, both prices including stamp+fees). We didn't topslice, and they are now at about 645p after hitting a high of about 690ish earlier this summer.

I thought I'd do some more research to see I can understand the SP has grown by about 48% over the last year or so, why it got there, and what is next. Firstly I did the numbers and figured out a range of valuations, using discount rates ranging between 7.8% - 9.4% and with the following models:

Using discounted cash flows, 400p-550p
Earnings power values, 380p-450p
Compounding earnings, 400p-680p (I cobbled these method up using a couple of books) [**]
Broker targets (I still don't really understand WTH these mean) 530p-620p over the last few months.
Simply Wall Street's DCF gives 566p

So at, recently, 645-690p seems a little on the high side.

Given the above, and the abstract nature of the numbers, so I decided to look at their competition. That was tough to find anyone who do exactly what Marshalls do (which is cutting, casting of stone and ceramic/concrete based construction materials + have own delivery fleet). In the UK I found

LON:IBST (ibstock UK) PE11 Mkt cap 990M
LON:MBH (Michelmersh brick) PE12 Mkt cap 83M
LON:FORT (forterra) PE10 Mkt cap 550M

MSLHs at 650p at PE 21.5 - 24.7 at forecast and previous earnings respectively. Mkt Cap 1.3B

I also took a look at one or two foreign outfits, which could be similar:
CEMEX:NYSE (American) (PE 12) Mkt Cap 5B
LON:CRH Multinational (PE 13.31-17) Mkt cap 26B
Wienerberger AG (Austrian) (PE 18.65) Mkt Cap 2.5B

Anyway looking at the firms excluding Marshalls the average PE for these firms is 13.2. It's easy to conclude to recent PE would suggest over valuation. I'm not too sure what it should be for this firm, though given levels of profitability (ROE 19.5%, ROCE inc. leases 15.5%), +100% cash conversion, good dividend cover and minimal leverage and gearing, then perhaps PE of 18-20 is reasonable.

(Although CRH are listed on the LSE, I looked briefly at their AR2018, and about 8% of their revenue is in the UK, and much of that in supply of aggregates, rather than exclusively paving/drainage stuff.)

Anyway, after comparing figures I tried to suss out why their valuation seems particularly strong. Next post.

Matt


[*] Another reason for my research I'm also house-sitting while wife+kids+mother-in-law are in Dorset, and it's too good to spend all day outside
[**] It uses RoE and retention ratio to estimate dividend cash flow and terminal book value

[TheMotorcycleBoy]

So I do believe that Marshalls business is as follows:

for domestic markets, paving (block and slab), cobble effect, garden walling, edging, in variety of stone types. Website has garden planner app. and web chat facility etc.
for commercial markets, similar paving, "street furniture", various drainage+integral paving and drainage options, traffic calming, bollards.

Looking at the other firms in similar business in my earlier post, and googling for "paving suppliers" and noticing Marshalls products coming up in several of the hits: e.g.

https://drivewaysandpatios.wales/pathways-cardiff/
"Parkstone Wales delivers on-time and on-budget jobs with wonderful workmanship, and superb materials from Marshalls, the UK’s most popular paving supplier, with whom they are accredited suppliers and regional award winners for 2018."
and https://www.pavingsuperstore.co.uk/,

has me thinking that they are probably the UK lead for all these kinds of products.

Matt

[TheMotorcycleBoy]

However, I'm still surprised at their current valuation. I'm thinking that the key is the commercial side of their business. I'm assuming that they have a lot of infrastructure projects in the pipeline, and of course the analysts/brokers have got wind of this.

Indeed, I believe that on my daily commute I witness their business in application. I am fortunate enough to use the St.Ives to Cambridge part of the A14, currently being upgraded:

https://www.gov.uk/government/news/plan ... a-motorway

it's quite likely a lot of drainage, bollard, edging applications of theirs are featured there. From the 2017 full year presentation:

Numerous cross-selling opportunities already identified including A14 and HinkleyPoint

So whilst the Hinkley Point has some bad press: i.e. on environmental issues (i.e. fish dying in the intake pipes), and the potential obsolence of nuke in the country (??), construction at the project has started. (The A14 project has about another 20 months to run).

Another project - HS2 also gets a mention along with the other two in here. So whilst, the HS2 project may be in doubt, presumably Marshalls will be considered in any replacement govt. rail project (e.g. Trans-Pennine railway improvement).

At one stage, I considered that the perhaps Marshalls gravy train could come to end with the culmination of A14, HinkleyPoint, and the cancellation of the HS2. But then I reasoned that now that they have acquired sufficient critical mass presumably they will continue to be selected to supply for future infrastructure projects?

Does anyone else here hold MSLH?

Do you share my views that their current good fortune is due, in addition to them cornering the domestic market, but also from the boost from their selection in these key infrastructure projects?

Matt

[TheMotorcycleBoy]

More Marshalls bumpf
https://www.obermatt.com/en/ceo-of-the- ... raphy.html

In August 2018 CEO sells 75000 shares for average of 462p
https://www.investegate.co.uk/marshalls ... 57323012Z/

I don't think there's much to read into this. I guess he thinks they are reasonably well priced there?

Matt

[TheMotorcycleBoy]

From https://www.marshalls.co.uk/documents/p ... tation.pdf
Revenue spread:

66% public sector and construction
29% UK domestic
5% international