Marks Electrical - lighting the touch paper (initiation of coverage)

Marks Electrical’s proven ability to serve the sizable UK major domestic appliance market with premium products on a next day delivery basis is central to its impressive growth story. The company’s combination of proprietary technology, scalable business model, ample demand headroom and demonstrably high-quality leadership supports the case for a higher valuation than so far awarded by investors. This report argues that a fair value / share is 150p.

• The group’s core operating model benefits from a 5-pillar approach which embraces up-to-date technology, a simple and proven distribution network, a scalable delivery model, premium products, and the importance of a favourable online user experience. These qualities should mean market share gains and sustainable financial strength.
• MRK’s addressable markets are sizable. It sells into a £5.3bn UK Major Domestic Appliance (MDA) market, of which it currently has just a 1.2% share. Moreover, MRK is now establishing itself in Televisions using the same operating platform. Importantly, online appears set to grow in importance for both MDAs and TVs with the likelihood that next day delivery, judging by other leading e-commerce providers, will become almost essential.
• Marks Electrical as a brand has substantial room to grow its recognition and overall identity, which means that reinvestment in the brand should generate notable returns. The company is actively increasing its own brand awareness and thus enhance sales in key regions. Aside from cash investment the Marks Electrical brand can benefit reputationally from the integrity of both the premium branded product and service offering – i.e. the “Marks Electrical Difference.”
• This is a well-run business with a dynamic leadership team. The group is centrally run from a single site in the logistically convenient city of Leicester, close to the UK’s all-important M1 motorway. Operating as a single site business massively simplifies daily running of the company’s delivery system. In addition, it allows employee performances to be enriched by a ‘tight’ focus and a common ambition to provide best-in-class service.

Prospects look exciting. First, the scalable nature of the business should deliver increased operating margins even after brand promotion. Second, there is scope to sustain growth from relatively low inventory levels which has clear, positive implications for free cash flow. At our 150p fair value level the implied ratings are an FY2023 EV/sales ratio of 1.6x and 19.1x EV/EBITDA.