Conor Maguire, founder and editor of the Value Situations Newsletter, shares his thesis on Marlowe plc, discussing the TIC segment catalyst, potential bidders, management incentives, bear case, FCF, risk factors, and how it fits his overall investing framework.
The potential sale of Marlowe's TIC business could unlock value and lead to capital allocation decisions such as buybacks or special distributions.
Marlowe's roll-up strategy and focus on essential services with high customer retention rates contribute to its strong organic growth potential and competitive advantage.
Marlowe's CEO has been successful in creating value for the company through a focus on creating liquidity events and incentivizing shareholders with share options.
Deep dives
Marlowe: An Interesting Roll-Up Opportunity with Potential Catalysts
Marlowe is a roll-up company that operates in the testing, inspection, and certification (TIC) as well as governance, risk, and compliance (GRC) sectors in the UK. The company has experienced strong organic growth and has successfully achieved its revenue and EBITDA targets. However, despite positive performance, the stock is undervalued, trading at a discount compared to peers and private market multiples. One possible catalyst for unlocking value is the potential sale of the TIC business, which represents 60% of revenues. Such a sale could generate significant cash and lead to capital allocation decisions such as buybacks or special distributions. Additionally, the GRC business, 40% of revenues, has the potential to be acquired at a favorable multiple as a standalone entity. Overall, Marlowe presents an interesting investment opportunity due to its value proposition, potential catalysts, and attractive growth prospects.
Resilient Business Model and Growth Drivers
Marlowe's business model is built on essential services such as fire safety, security, and compliance, which are legally mandated and enjoy high customer retention rates. The company's roll-up strategy allows for synergies and cross-selling opportunities, leveraging a local route density approach. Its market growth is driven by increasing regulations and compliance standards, offering a secure market for recurring revenues. With a resilient and recession-resistant model, the company benefits from attractive unit economics and impressive organic growth potential. These factors contribute to Marlowe's ability to generate consistent and resilient organic growth of around 10%, creating a competitive advantage within its sectors.
Risks and Mitigating Factors
While Marlowe presents an attractive investment opportunity, there are some risks to consider. One major risk is the delay or failure in executing a potential sale of the TIC business, which is seen as a catalyst for unlocking value. The market's response to a potential sale will depend on the pricing expectations and could impact the investment case. Another risk is the potential for poor capital allocation or large-scale acquisitions that could negatively impact the business. However, Marlowe's track record and defined framework for acquisitions provide confidence in their ability to execute disciplined capital allocation. Lastly, while diluted risk exists due to equity placings, the management team's major ownership and history of successful equity raises mitigate this risk. Overall, Marlowe offers a compelling investment opportunity with strong growth prospects and potential catalysts.
Marlowe's CEO has created significant value
The podcast discusses how Marlowe's CEO, Alex Staker, has been successful in creating value for the company. The host mentions that Marlowe has outperformed other well-known serial acquirers in terms of share price performance, indicating Staker's ability to generate returns for shareholders. The CEO has achieved this by focusing on creating value and liquidity events, rather than relying on high salaries or incentive plans. The podcast highlights Staker's share options incentives, which crystallize on a change of control, as well as the management team's goal to achieve a 10% total shareholder return by April 2026.
Addressing the bear case on Marlowe
The podcast also addresses the bear case regarding Marlowe, which questions the company's huge adjustments on earnings and the lack of cash flow generation. The host and the guest provide insights to counter these concerns, stating that the restructuring costs associated with integrating acquisitions are part of the operating costs of a roll-up business model. They explain that these costs are temporary and will diminish over time, leading to improved cash flow generation. They also highlight the strong cash flow performance of Marlowe in the back half of fiscal year 2023. Moreover, they mention that the company's low valuation and the potential for running the business for cash flow purposes further mitigate the bear case.
Conor Maguire, Founder and Editor of the Value Situations Newsletter, joins the podcast for his second appearance to share his thesis on Marlowe plc (LSE: MRL), provider of a broad range of compliance software and services in areas which pose a high risk for businesses.
[0:00] Introduction + Episode sponsor: Stream by Alphasense
[1:41] Overview and investing thesis on Marlowe plc (LSE: MRL
[13:49] $MRL's TIC segment - what is the catalyst here
[18:11] Potential bidders for TIC segment
[25:12] Management incentives
[30:58] Marlowe $MRL.L bear case
[40:58] FCF and $MRL.L moving forward
[47:24] Risk factors / what worries Conor about $MRL.L
[53:09] How does $MRL.L thesis fit Conor's overall investing framework?
Today's episode is sponsored by: Stream by Alphasense
Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you.
But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
