A rising UK share

Shares in insolvency litigation specialist Manolete Partners (LSE: MANO) have halved in value over the past 12 months. This is because a strong economic recovery in the UK, and significant government support to ailing businesses, has hit the number of new cases experienced by the firm.

But Manolete’s share price edged 1% higher on Wednesday following the publication of full-year financials.  Revenues soared 49% during the financial year to March, to £27.8m. Meanwhile, Manolete’s retailed share of gross cash from completed cases rocketed 113% to £6.8m. And the UK legal share completed on a record 135 insolvency cases last year. It made 198 new case investments too, another all-time record.

The impact of that government assistance, along with increased staffing costs and a reassessment of the value of in-process cases during the pandemic, caused pre-tax profit to slump 26% to £7m. But Manolete expects the number of cases to rise as Covid-19 lockdown measures are rolled back and the government’s emergency suppression of insolvencies ends in September.

“With the widely reported large backlog of insolvency cases, we expect new case enquiries to increase over the foreseeable future and we will continue working hard to deliver outstanding returns to both the creditors of insolvent estates and our investors,” Manolete commented.

Good momentum

The Marlowe (LSE: MRL) share price has fared much better than Manolete Partners during the past 12 months. The UK health and safety share has ballooned almost 80% in value as its aggressive approach to M&A has paid off. The business rose 1% on Wednesday too following the release of its own full-year financials.

Revenues rocketed 15% year-on-year during the 12 months to March, to £192m. And margins rose to 16.2%, from 13.1% previously. This was thanks to the positive impact of acquisitions, steps taken to improve productivity, and the leveraging its back-office infrastructure. All this meant that pre-tax profit soared 31% over the period to £17.1m.

Marlowe – which provides safety and compliance software and services — noted too that current 12-month run-rate revenues sit at £280m, 83% of which is recurring in nature. The company made 15 acquisitions in total last year and has continued spending heavily on M&A to supercharge future earnings growth. It’s made a further eight acquisitions since April to improve its presence in key markets.

Today, Marlowe affirmed its plan to generate run-rate revenues of £500m and adjusted EBITDA of £100m by financial 2024. The UK share said it hopes to achieve this “through deepening our market share across our sectors, broadening our activities across the business-critical arena, strengthening our business via operational improvements and delivering on our digital strategy.”

And for the current financial year? Marlowe said it’s enjoyed a “strong start” with “good” levels of organic growth in the high-single-digit percentages across its businesses.

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Back then, it had almost utility-like status in the eyes of investors. Its dividend was high but reliable, while its growth prospects were steady and robust. Now, though, it is viewed as somewhat risky by investors, with its financial outlook causing a degree of fear among investors.

Could it now offer recovery potential? Or, is it worth avoiding alongside what appears to be an overpriced stock that released a trading update on Monday?

High valuation

The company in question is safety and regulatory compliance specialist Marlowe (LSE: MRL). Its 2019 financial year saw good progress for the business, with its revenue rising by 62% to £130m. Acquisitions and broad-based organic growth contributed to its improved performance, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is due to be slightly ahead of expectations.

Although the company appears to have a bright financial future, with its bottom line forecast to rise by 15% in the current year, it seems to be overpriced. For example, Marlowe trades on a price-to-earnings growth (PEG) ratio of 2.2, which suggests that it lacks a margin of safety. Therefore, it may be worth avoiding at the present time, with there being better-valued opportunities available elsewhere.

Low valuation

By contrast, Vodafone now seems to offer a wide margin of safety. Clearly, it is unusual for a FTSE 100 company with the track record of dividend payments that Vodafone has to experience such a large share price fall at a time when the wider index has fared much better.

However, investors now seem to be anticipating a lower growth rate in earnings over the long run. The company’s shares trade on a price-to-earnings (P/E) ratio of around 14, while their dividend yield of over 9% suggests that there is a lack of confidence among investors regarding dividend growth. Indeed, there are concerns among some investors that a dividend cut may be ahead, such are the financial commitments resulting from an aggressive acquisition and investment strategy.

A change in management may mean a period of greater instability in the short term. But the company’s fundamentals suggest that it could offer strong growth. As well as a fair valuation and a high yield, the company’s performance outside of Europe was strong according to its recent update. Changes being made to its structure could create a simpler business that is better positioned to deliver improving earnings growth.

Therefore, for income and value investors alike, now could be the right time to buy Vodafone. It could offer recovery potential in the long run as a result of a favourable risk/reward ratio.

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Providing services everyone needs 

One such potential gem that’s currently covered by just two analysts is £190m market cap support services firm Marlowe (LSE: MRL). Since forming two years ago, the firm has exploded onto the scene thanks to an acquisition-heavy business model that has seen it hoover up 19 competitors offering support services such as installing and maintaining fire, water and air protection systems.

This had been a highly fragmented market with small players offering a few local clients only a single one of these services. Marlowe on the other hand has grown rapidly by bundling these services together to offer business customers lower rates while still improving its own margins by more efficient use of system engineers, as well as cutting out duplicate head office costs.

With revenue up 72% last year to £80.6m, EBITDA jumping 81% to £7.2m and a management team coming from highly successful roll-ups like Restore and Impellam, I don’t expect Marlowe to be an under-covered hidden gem for long.

Premiumisation pays off 

I also expect big things from City Pub Group (LSE: CPC). It owns and runs 46 pubs focusing on higher quality food and drink for customers willing to pay extra for less corporate-feeling places in which they can spend some time. With its share price up over 20% since listing in late 2017, the company’s market cap has grown to £130m, yet it’s still only covered by just two analysts.

I reckon this will change in the near future as the company is growing quickly by both acquiring new pubs and increasing sales at its existing outlets. In the year to December, this two-pronged growth strategy saw revenue rise 35% to £37.4m thanks to like-for-like sales increasing 3.8% and the addition of new pubs.

Due to increasing benefits of scale, the group’s adjusted EBITDA rose 51% during the period to £6.1m. With a net cash position and proven ability to gin up increased sales out of its pubs, I expect further acquisitions to be made in the wealthy southern towns the company targets.

A hidden income and growth gem

With a market cap of just £54m, it’s not a surprise there’s only one analyst covering diversified financial Ramsdens (LSE: RFX). However, I reckon this may change going forward as the Northern-focused company grows where others fear to tread by offering customers pawnbroking, cheque cashing, jewellery retail and foreign exchange services from its growing estate.

In the year to March, the addition of a net four stores took its estate up to 131 stores, which together with positive growth in each of its four offerings and an increased focus on online sales led to revenue rising 16% to £39.9m. Meanwhile, increased scale boosted EBITDA by 31% to £7.9m.

And even after increasing its full-year dividend payouts from 1.3p to 6.6p year-on-year, rising profits meant the group ended the year with £12.7m in net cash. As a trusted name in a much maligned sector, I see plenty of potential for Ramsdens to use its financial firepower to continue taking market share and rewarding investors with both great income and capital appreciation.   

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However, I believe NMC has every prospect of continuing the growth that powered its shares into the Footsie and that the current valuation remains highly attractive. Along with this growth giant, I see great value in a smaller company that released forecast-beating annual results today.

PEG value

Brexit is something investors in NMC don’t need to be concerned about, which is one of the things I like about this business. The group is the leading private healthcare operator in the United Arab Emirates. It operates or manages over 150 assets across 13 countries and made a net profit of $209.2m on revenue of $1.6bn last year. That’s a good bottom-line margin of 13%, which is another of the things I like about the business.

Last but not least, the company has a terrific record of earnings growth, which continued last year with a 33% rise in adjusted earnings per share (EPS) to $1.036. According to a Reuters consensus, City analysts are forecasting a 42% increase this year to $1.47 (110.5p at current exchange rates), giving a price-to-earnings (P/E) ratio of over 32 at a share price of 3,580p. While the P/E is a premium one, the forecast 42% EPS growth means the price-to-earnings growth (PEG) ratio is 0.8. This ratio is well to the good value side of the PEG fair value marker of one and makes the stock a ‘buy’ in my book.

Buy-and-build

Marlowe (LSE: MRL) was formed as a platform to create shareholder value through the acquisition and development of businesses in targeted outsourced service sectors across the UK. Commenting on today’s results, chief executive Alex Dacre said: “In our second year of trading as Marlowe plc we are pleased to report another strong financial performance and a year of substantial progress in developing the scale and breadth of our platform for growth.”

This sort of acquisitive business model doesn’t always appeal to me, but the chief executive has expertise in successfully executing buy-and-build growth strategies and I like the sectors Marlowe is targeting: namely, critical maintenance services in fire protection, security systems, water treatment and air hygiene. As many of these services are mandatory and necessitated by stringent legislation and regulation, I believe the business should prove more resilient than many through the economic cycle.

Today’s results for the company’s financial year ended 31 March saw a 72% increase in revenue to £80.6m (versus a Reuters consensus of £72.75m) and a 35% rise in adjusted EPS to 14p (consensus 12.7p). The shares are currently trading 3% higher on the day at 417p, which gives a market cap of £144m and a trailing P/E just shy of 30. As with NMC, this is a premium P/E but one I believe is justified by the high rate of EPS growth, which looks set to continue with further acquisitions and increasing economies of scale. I’d be happy to buy a slice of this smaller-cap company today, with its potential to become a mid-cap in due course.

The post Why I’d buy this secret growth star and this FTSE 100 growth giant appeared first on The Motley Fool UK.

However, despite the low P/E, I don’t believe this £99m FTSE SmallCap stock is a bargain. Indeed, I’m steering well clear of it. Here’s why.

Continuing lack of visibility

In exiting its Energy from Waste business, Interserve made a provision of £70m for incurred and anticipated losses in May 2016. It raised this to £160m in February this year, to in excess of £160m in September and to £195m in October.

Meanwhile, trading in the group’s remaining core operations — UK support services and construction (together 75% of group revenue) — deteriorated markedly in Q3. And in the space of five weeks, the board went from being “confident” of the company meeting its banking covenants at the end of the year to believing “there is a realistic prospect that we will not meet the net debt-to-EBITDA test.” As a result, it’s now in “constructive and ongoing discussions” with its lenders.

Management has clearly had little handle on even the near-term prospects of the business. And due to the continuing lack of visibility on provisions, trading and financial position, it remains firmly on my list of stocks to avoid. However, readers may also wish to check out the contrarian case put by my Foolish friend Bilaal Mohamed, who argues the pendulum has swung in favour of it being a value play.

Tremendous growth

I’m far more bullish about another small-cap firm in the support services sector. AIM-listed Marlowe (LSE: MRL) has released its half-year results, sending its shares up 3.8% to 353p and giving it a market cap of £121m.

The company reported a 104% increase in revenue to £36m for the six months to 30 September and said its current 12-month run-rate revenue is in excess of £80m. Acquisitions account for the tremendous top-line growth. Following on from eight last year, there were four during the latest period and two since the period end.

Marlowe emerged from a cash shell in May 2015 and is pursuing a strategy of building the UK’s leading group of critical asset maintenance businesses. Its two divisions are Fire Protection & Security and Water Treatment & Air Hygiene and it says it has a well-developed pipeline of acquisition opportunities to continue to add further scale to the group.

Buy-and-build strategy

I’m generally quite wary of companies pursuing buy-and-build strategies but Marlowe appeals to me for a number of reasons. First, the chief executive has previously generated value for shareholders at other companies by employing this strategy. Second, Marlowe’s acquisitions to date have been integrated smoothly and delivered synergies in line with those anticipated. And third, I like the areas of business on which the group is focused, which have a significant element of non-discretionary spend, and strong regulatory and legislative drivers.

Forecast P/Es of 28 for the current year and 23 for next year are not extortionate, in my view, and with likely earnings-enhancing acquisitions in the pipeline, the shares look very buyable to me at their current level.

The post Why I’d avoid Interserve plc and buy this brilliant growth stock instead appeared first on The Motley Fool UK.

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.

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The business, which specialises in the acquisition and disposal of firms that provide critical asset maintenance services, announced on Friday that trading during the first half of the fiscal year had been “in line with our expectations.”

Marlowe said that both of its Fire Protection & Security and Water Treatment & Air Hygiene divisions had “performed well” during April-September, with the four acquisitions made in the period “proceeding to plan and synergies in line with those anticipated on acquisition.”

On top of this, the AIM company advised that net cash clocked in at £3.1m as of the close of September, putting it in good shape to continue its acquisition-led growth strategy.

This should create plenty of optimism that Marlowe can churn out exceptional profits growth in the years ahead. Its aggressive M&A programme is steadily building its list of blue-chip clients, bolstering its territorial footprint, and providing the business with exceptional cross-selling opportunities.

And as the support services star itself alluded to today, the abundance of health and safety regulations that industry must now abide by provides plenty of scope for it to deliver excellent sales growth.

Fearsome growth forecasts

City brokers are certainly predicting big things for Marlowe’s bottom line. Current forecasts are putting earnings for the period ending March 2018 at 12.6p per share, which would mark a significant improvement from last year’s result of 1.1p.

And this rampant rise is not expected to be a flash in the pan — earnings are expected to bulge again next year, a 22% rise predicted to 15.4p.

What’s more, these stunning predictions are expected to encourage Marlowe to start chucking out dividends. A 4p per share reward is anticipated for the current period, yielding a handy 1.1%. And the London business is then predicted to keep rewards moving higher at quite a lick, jumping to 5.2p next year and yielding 1.4%.

I reckon Marlowe’s bright growth and income prospects make it worthy of its conventionally-high forward P/E ratio of 28.8 times.

Sticky star

Those seeking scintillating earnings expansion should also take a look at Scapa Group (LSE: SCPA) right now.

The Mancunian business has a rich history of doling out double-digit annual earnings increases and, thanks to its impressive work to improve margins across the business, is setting itself up to continue this trend.

And the firm — which manufactures adhesive products for healthcare and industrial markets – can rely on its position as a leading provider of turnkey solutions to the defensive medical market to keep pushing group sales higher. Revenues at its Healthcare unit punched 7.9% higher (or 2.1% at constant exchange rates) between April and September.

My view is backed up by City forecasts which point to profits growth of 15% and 11% in the periods ending 2018 and 2019.

I reckon Scapa’s impressive growth record makes it deserving of a weighty prospective P/E ratio of 27.9 times.

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Overseas growth

£91m cap Tristel is a manufacturer of infection control, contamination control and hygiene products. Based on today’s encouraging trading update, I’m confident it won’t remain a market minnow for much longer.

For the year to the end of June, the company expects to book turnover “in excess of” £20m, at least 17% more than the £17.1m achieved in 2016. At £4m, pre-tax profits are predicted to be just over 21% higher than those achieved 12 months earlier.

Aside from the fact that these numbers are ahead of market expectations, the most encouraging snippet from today’s update was surely confirmation of the company’s growing presence outside of the UK. In H2, revenue from overseas operations contributed 50% of that achieved by the company as a whole — a 16% improvement on the numbers from H1. This huge amount of growth over such a short period means that overseas revenue is now expected to contribute 47% of that achieved for the full year — a record for the company.

Tristel attributes much of the aforementioned rise in overseas revenue to last July’s £950,000 purchase of its Australian distributor. Elsewhere, the company has entered the North American Market and also invested $750,000 in Mobile ODT — a business focused on “combining smartphone technology with hand-held medical devices for point-of-care diagnostics“.

Its finances remain in good order. While cash balances — at £5.1m — were slightly reduced from 2016 ‘s level (£5.7m), the company has no debt on its books.

With excellent growth credentials, defensive attributes and rising returns on capital employed, this is surely one company worth keeping an eye on.

Acquisition-friendly

Recent full-year results from £124m cap support services group Marlowe showed a company with serious growth ambitions.

To recap, the company achieved just under £47m in revenue over the year to the end of March and adjusted EBITDA of £4m. Like Tristel, Marlowe was able to boast a net cash position (£3m). 

Perhaps more importantly, it completed and integrated eight acquisitions over those 12 months, demonstrating how keen it is to become a major player in the fragmented Fire & Security and Water Treatment markets.

Since the end of the reporting period, Marlowe has added Advance Environmental Limited and Ductclean UK to its list of purchases. In keeping with CEO Alex Dacre’s earlier proclamation that the company had a “well-developed pipeline of attractive opportunities“, the latter allows Marlowe to enter the air hygiene market — one its believes offers “significant scope for consolidation“.

I can see the shares climbing higher for some time to come, particularly as the recent tragedy at Grenfell Tower is likely to generate huge interest in the fire protection services offered by the company.

Only wishlist?

You might wonder why I’ve added the above companies to my watchlist/wishlist and not purchased them. For me, it’s all down to their current valuations. Right now, both shares trade on 28 times forecast earnings, suggesting a lot of good news is already priced in.

While there’s no guarantee that Trisetl and Marlowe will ever be cheaper, I believe it might be prudent to wait in the hope of a general market dip before buying into either.

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Strong start

Reporting on Thursday was acquisition specialist Marlowe (LSE: MRL). In its first year trading as Marlowe plc it was able to deliver eight acquisitions, with one further acquisition after the year-end. During the period, it has established a platform for growth which is focused on the fragmented fire & security and water treatment markets. It was able to achieve run rate revenues of £65m, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) was £4m.

With net cash of £3m and debt headroom of £15.3m, there seems to be scope for further M&A activity over the medium term. In fact, the company has identified a well-developed pipeline of attractive opportunities which could add scale to the business. This could help it to achieve its goal of building a leading UK support services group in critical asset maintenance.

Looking ahead, Marlowe is forecast to record a rise in its bottom line of 24% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests it could offer capital growth potential. That’s despite its shares having risen by 26% in the last three months. With investor sentiment on the up and its financial performance set to improve, now could prove to be the right time to buy a slice of the company.

Wide-ranging potential

Also making gains in recent months have been shares in Curtis Banks (LSE: CBP). The pension administration services provider has risen by 14% since the start of the year. However, it continues to trade on a relatively enticing valuation. For example, it has a price-to-earnings (P/E) ratio of 23 despite being forecast to post a rise in earnings of 33% in the current year, followed by further growth of 13% next year. This translates into a PEG ratio of 1, which indicates its share price could move considerably higher over the medium term.

As well as growth and value appeal, Curtis Banks also offers significant income potential. It may only yield 1.5% at the present time, but it is expected to record a rise in dividends of 25% this year, and 20% next year. This puts it on forward yields of 1.9% in the current year and 2.3% next year. Despite this, it is expected to cover shareholder payouts almost three times next year. This suggests dividend growth could easily beat earnings growth over the coming years. With inflation moving higher, this could increase the appeal of the stock and help to push its share price higher.

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