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A better than expected EPS outcome, strong cash conversion and an unusually high return on capital were pleasing financial features of Marks Electrical Group’s (MRK) FY2022 results statement, published today. The company also reports an upbeat start to FY2023 while articulating a clear path to sustainable growth through its customer proposition, increasing brand awareness, higher operational capacity and favourable financial dynamics. Expecting further meaningful progress this year, we reiterate our 150p / share fair value.Marks Electrical’s FY2022 results follow a trading statement released on 11 April in which the company reported 44% net sales revenue growth and guided towards 9.0% EBITDA margins. Today’s announcement incorporates a pleasing 5.01p adjusted EPS outcome, a 57% ROCE and 119% cash conversion, as well as a 0.67p final dividend. End-year net cash was £3.9m.
The group’s invigorated customer proposition implies an ability to deliver both to a wider UK geographic footprint while maintaining service levels. Moreover, the company expects to broaden its product offering both within major domestic appliances (MDAs) and consumer electronics (CE).
Given the company’s still relatively low 1.6% share of a sizable market (up from 1.2% in FY2021), there should be significant revenue gains available from its improved brand awareness programme. Currently, recognition of MRK is estimated to be 7% in England. Encouragingly, progress was made in FY2022 with an increase in London (the UK’s largest next day delivery market) from 3% to 4%.
Expansion of operational capacity at the company’s single headquarters site in Leicester gives headroom to match increased demand. MRK continues to add to both warehouse capacity and increase the size of its branded van delivery fleet while making important additions to hiring. A strong people culture remains an important component of the growth story. Furthermore, the company’s ability to finance growth should benefit from being a debt-free business with strong cash conversion.
Valuation does not reflect the clarity of MRK’s growth outlook in our view. In particular, we argue that the company’s well defined growth strategy - and ability to implement it - is superior to its peer group: much of which is not profitable. At our 150p fair value level, implied valuation ratings are an FY2023 EV/sales ratio of 1.6x and 18.6x EV/EBITDA.
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