Marlowe (LSE: MRL) buys up and develops “companies that provide critical asset maintenance services“, and on Thursday the company announced its latest acquisition. It’s bought dB Audio and Electronic Services Limited, which provides “a portfolio of fire protection services” for an enterprise value of £0.2m.
After several years of essentially break-even performances, Marlowe posted an adjusted pre-tax profit of £3.3m for the year to March 2017, from revenue of £46.8m (with statutory pre-tax profit coming in at £700,000), and earnings per share of 1.1p.
In a first-half trading update on 20 October, the firm told us that the integration of its four acquisitions during the period was going well and already producing synergies, as anticipated. An “increased awareness of the requirement for the high standard of maintenance that is needed to comply with health & safety laws and regulations” was apparently bringing benefits.
Growth through acquisition
Net cash stood at around £3.1m, strengthened by a placing last December that raised £10m, and in April, the company revealed an increase in its debt facility with Lloyds Banking Group to £17.5m.
Interim results are due on 11 December, and I’m expecting them to support the impressive forecasts being put out by the City’s analysts right now. They’re expecting the start of serious earnings per share (EPS) at 12.6p by March 2018, with 2019’s predictions for a 22% increase taking that up to 15.4p.
The share price has responded, gaining 250% over the past two years, but has it gone too far? Well, it’s been flat for 2017, and we’re looking at a forward P/E of 29, dropping to 23.5 next year. That anticipates solid future growth, and I can see it happening.
Software growth
I spent many years in software development, and I was always aware of Micro Focus International (LSE: MCRO) as a reliable provider of high-quality business software.
When the company floated on the stock market in 2005, I expected it to do well, and it has. Since then, the price has multiplied more than 13-fold to today’s 2,547p, and the company has been handing out growing dividends every year. Do I wish I’d bought some back then? You bet I do.
Forecasts would put the shares on a P/E multiple for the year to October 2018 of a shade under 16. That’s a little ahead of the long-term FSTE 100 average of around 14. And Micro Focus’s dividend yields are pretty close to the FTSE average, too — they’ve ranged between 2.6% and 4.4% over the past five years, with forecasts suggesting around 3%.
No plodding here
I’d say that’s a ‘reliable plodder’ valuation — but Micro Focus is no plodder. EPS is predicted to grow by 21% this year and 11% next, which would double EPS between 2013 and 2018 — and that makes those P/E ratios look like bargain territory to me.
Some were uncertain about the firm’s acquisition of the software business segment of Hewlett Packard Enterprise (HPE), as the target’s revenues had been declining. But cost-cutting and the paring back of less profitable product lines has already been paying off, with the revenue decline improving to a modest adjusted fall of 2% by Q3, and operating margins improving to 24.9%.
Micro Focus’s proven ability to keep costs down and margins up should, I think, enable it to turn HPE round into growing revenues in the future, and I see it as a sound long-term purchase.
