Investors are undervaluing this landscaping supplier with solid foundations

Sound balance sheet and restructuring programme to cut costs should see construction supplier Marshalls through the difficult economic environment

Marshalls’ full-year results, published in March, contained both a dividend cut for 2023 and a profit warning for 2024. The share price has fallen to levels no higher than those seen nearly 20 years ago.

This sounds like very unpromising material indeed, but it is exactly why the landscaping and building and roofing products supplier is so interesting – and the shares catch the eye for three reasons.

First, the share price slide means a lot of bad news is already baked into the valuation, which seems to give the company little credit for any potential recovery in sales, earnings or dividends. Marshalls made nearly 30p in earnings per share in 2019, just before the pandemic, and the dividend reached 15.6p a share in 2022. A return to anything like those levels would leave the stock looking cheap on both in terms of earnings and yield.

Second, the balance sheet is sound, and this should see the company, which is based in Elland, West Yorkshire, through the difficult economic environment. The net debt position of just more than £200m, adjusting for cash, leases and a pension surplus, represents less than one third of shareholders’ funds. Interest was covered more than two times in 2023 even when profits were depressed, and underlying cash flow was healthy.

Finally, the company is not sitting around doing nothing. Management squeezed cash out of inventories and trade receivables in 2023 to reduce the net debt position, withdrew from the Belgian market to focus on the UK and launched a restructuring programme to cut costs by £11m over two years.

About 40pc of the benefits of that were achieved last year, with the rest due to come through in 2024 so new chief executive Matt Pullen is starting off on the front foot in that respect.

Last year’s stated profits were badly dented by some £20m in restructuring charges and asset impairments, but management believes that 2024’s profits will be no higher than those of 2023, on an underlying basis, once those items are taken out of the equation. That means patience may be required for any turnaround to take effect, but Marshalls is primed to capitalise upon any improvement in volumes and therefore revenues as and when it comes.

That will require an improvement in the UK’S economic fortunes and a prolonged downturn or period of torpid growth remains a key risk to the investment thesis.

But earlier this month Sweden joined Hungary, Switzerland and the Czech Republic in cutting interest rates and markets are starting to think that the European Central Bank will also reduce the headline cost of money at its next meeting, with our own Bank of England following shortly after.

Interest-rate sensitive stocks such as housebuilders, banks, real estate investment trusts and insurers are already moving in anticipation of that policy pivot. While it would be unwise to rely too heavily upon the Bank of England doing anything, given the mess it made of its “transitory inflation” call, rate cuts could be a boost to shares in the masonry, mortar, paving, walling and pitched roof expert.

Questor says: Buy Marshalls as its recovery continues apace

Update: GSK

We are already more than 20pc to the good on GSK after last year’s study, with 58p of dividends on top, and the pharmaceuticals giant looks capable of offering further gains and income if the first-quarter results are any guide.

Chief executive Emma Walmsley raised guidance for sales and profits for the year and the board also sanctioned an increase in the dividend, with the result that the shareholder distribution is now set to reach 60p a share in 2024, up from 58p in 2023.

That equates to a 3.4pc dividend yield, which can top up the pot as the FTSE 100 member continues to improve returns on its research and development work. The drug pipeline continues to blossom across all of GSK’S key therapeutic areas of HIV, infectious diseases, oncology and immunology, with 72 treatments in Phase I, II or III development and more than 40 regulatory decisions due in the next 18 months alone.

Positive developments there should help to underpin earnings momentum and cash flow. The shares do not look expensive on a forward price-toearnings ratio of barely 11 times, based on consensus analysts’ forecasts.

Questor says: GSK seems to be in rude health. Hold.

‘The share price slide means a lot of bad news is already baked into the valuation’