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  • Writer's pictureMark Watson-Mitchell

Inflexion deal gives Marlowe scope for a big re-rating 

In February 2021, Marlowe (LON:MARL), the safety and regulatory compliance services group, set out a new three-year strategy to achieve an aim of doubling group revenues to around £500m, while almost tripling group adjusted EBITDA to some £100m, with a 20% adjusted EBITDA margin and delivering over 90% cash conversion.  


It also targeted a software ARR of at least 10% of overall group revenues.  


The basis of delivering that new strategy was its ‘Deepen, Broaden, Strengthen and Digitalise’ plan. 


At the time of announcing that new plan its shares were trading at around 680p, they peaked at 1,020p in December 2021, and a year later they were down to 405p – typically showing the vagaries of the marketplace. 


Market Whispers 


In early July last year, I noted to Master Investor subscribers that recent market whispers had suggested that the group was contemplating the sell-off of its testing, inspection and certification division, with £650m possibly being the currently negotiated disposal value. 


At that time, when its shares were 576p, I opined that if the market rumours prove to be well-founded then such a TIC side disposal would clear the group’s £160m net debt position and leave it very well funded for future impactive acquisitions. 


However - Think Again 


Instead of selling off TIC, the group has agreed to sell certain of its Governance, Risk & Compliance software and services assets to Inflexion Private Equity for an enterprise value of £430m on a debt-free, cash-free basis. 


That side generates some 40% of the group’s total EBITDA. 


Marlowe said that the divestment, which accounts for around 20% of its revenue, contributed £85.8m in revenue and £31.4m in earnings before interest, tax, depreciation and amortisation in the year ended March 31. 


Upon completion of the deal the group intends to fully retire its debt facility, and then return around £150m of cash to its shareholders.  


What Is Left? 


The divestment does not include Marlowe's Compliance Services businesses in OH and TIC, which represented approximately 80% of Group revenues in FY23. 


The remaining business, which would be left with a net cash position of about £60m at year-end, would be split into two main divisions – TIC and OH.  


Testing, Inspection and Certification 


The TIC side services largely revolve around keeping its customer's business premises safe and compliant with relevant regulation and legislation, addressing compliance requirements across fire safety & security, and water & air hygiene. 


This division is focussed on ensuring the safety and compliance of customers' business premises in accordance with relevant regulation and legislation.  


With a focus on fire safety & security and water & air hygiene, its comprehensive services cater to some 27,000 customers.  


This extensive support is delivered by around 1,900 specialists who consistently achieve best-in-class compliance rates, reinforcing the division’s market-leading position.  


Operating on largely multiyear contracts, its offerings are underpinned by regulations making them mandatory, which results in a high degree of recurring revenues. 


Occupational Health 


Marlowe's Occupational Health division is the UK leader in the occupational health and wellbeing sector.  


The backdrop for the UK workforce is one that is getting older and progressively less healthy with an estimated £90bn+ lost through absence and presenteeism in the UK.  


In addition, the compliance burden for employers is significantly increasing. 

 

Its comprehensive OH services improve the health & wellbeing of its customers' employees, minimising workplace risk and maximising corporate productivity.  


The services are delivered, often through multi-year contracts, by some 900 occupational health clinicians to over 3,000 customers.  


Like the TIC division, it ensures compliance with regulations, such as HSE, COSHH, Noise at Work Regulations and the Working Time Directive, which provides a high degree of recurring revenues. 


Knowledgeable Share Trading Perhaps 


A week ago, the group’s shares, just two days ahead of the deal announcement, were trading at only 360p – the next day they responded to some possibly knowledgeable buying, closing at 425p. 


On Thursday 22nd February, upon the announcement they hit 600p with some 6.57m shares changing hands that day, before closing at 502p. 


Too Low A Valuation 


Last Friday saw another 2.13m shares traded, closing at 530p, valuing the whole group at just £509m. 


That is far too low a valuation, assuming the deal completes. 


This Inflexion transaction leaves the group’s investors with 60% of the generating businesses and clears all debt, while putting £60m of cash into the bank, as well as £150m cash being given back to shareholders (just how that is going to be done is yet to be announced – hopefully a cash payment as opposed to a ‘buyback’). 


This disposal simplifies the group's focus and strategy upon its core compliance services businesses and is sure to be a major ‘swivel-point’ for the group. 


Management Comment 


Chairman Kevin Quinn stated that: 


"This divestment represents an excellent outcome for Marlowe and its shareholders and underscores the significant value that has been created through the delivery of our growth strategy.  


The valuation achieved demonstrates the substantial potential within our business and will reset our capital structure, giving Marlowe strategic agility whilst delivering meaningful returns to our shareholders.” 


The Equity 


There are some 96.8m shares in issue. 


Largest shareholder, Michael Ashcroft, with 12.27% of the equity must be pleased to witness the Inflexion deal. 


Other large holders include Capital Research & Management (7.14%), Slater Investments (5.543%), Abrdn Investment Management (4.97%), Threadneedle Asset Management (3.81%), Aegon Asset Management (2.96%), Canaccord Genuity Wealth (2.69%), Danske Bank (1.17%) and Sp-Fund Management (1.03%). 


Current but soon departing CEO Alex Dacre, who will transfer with the Divestment, holds 4.84% of the Marlowe equity. 


Where To Now 


The divestment will allow the group to capitalise on the inherently attractive end markets of TIC and OH, to strengthen its balance sheet while also providing an opportunity for a more optimised approach to capital allocation. 


In due course it may well invest in carefully selected bolt-on acquisition opportunities across the remaining Occupational Health and TIC assets once restructuring investments in respect of historically completed acquisitions have reduced. 


It may be too soon yet to predict the levels to where its shares are headed, but they continue to have strong appeal. 


Analyst Calum Battersby at Berenberg retained his ‘buy’ recommendation and target price of 720p on the stock, anticipating a rerating on the company’s de-risked balance sheet and cleaner future equity story for the remaining business. 


There are 5 analysts that follow the company, the consensus average Price Objective is 748p,



the highest price sought is 1,000p, while the lowest is just 453p. 


The shares closed last night at just 512.50p, valuing the whole group at just £496m, which makes them look like an extremely attractive proposition. 


(Profile 30.01.20 @ 468p set a Target Price of 550p*) 

 

(Asterisks * denote that Target Prices have been achieved since Profile publication) 

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