An attempt to salvage the rubble of our investment thesis

Telegraph

18 hours ago

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest
We must now pick through the rubble of our investment thesis after last week's profit warning from landscaping and building and roofing products supplier Marshalls. The share price caved in, to leave us sitting on a nasty book loss of around 30pc and with a decision to make as to whether to cut and run, or to try and tough it out.
We shall go for the latter, partly because we are habitually reluctant to liquidate a holding in a company where the shares are no higher than in 2000, and partly because we try to adhere to legendary investor Charlie Munger's assertion: 'You don't make money when you buy, and you don't make money when you sell. You make money when you wait.'
The update was undeniably disappointing. In the first six months of the year, Marshall's revenues rose 4pc, as higher volumes offset lower prices. Roofing and building products both showed a higher top line, but landscaping offered a 1pc drop, and this is where the outlook turned ugly. Lower volumes, price competition, an unhelpful product mix and input cost inflation have left the unit near breakeven and weighed heavily on overall group profits. After the alert from the West Yorkshire-headquartered company, analysts slashed their earnings forecasts by a fifth for 2025 and by around a sixth for next year.
The net result is that the shares are more expensive now than they were 15 months ago on an earnings basis, even after the share price calamity, thanks to those downgrades. That said, a forward price-to-earnings ratio of some 15 times does not seem so unappealing given the multiple is based on what should prove to be depressed profits. Marshalls made nearly 30p in earnings per share (EPS) in 2019, and the share price represents barely seven times that figure, which is a lot more enticing.
Granted, that 30p number looks a long way away when the consensus analysts' forecast for 2025 is 14p, the macroeconomic backdrop does not feel unduly helpful, and even the putative recovery only takes EPS estimates to 17.5p by 2027. But management is already looking to take out further costs and at some stage it seems logical to expect further interest rate reductions from the Bank of England.
Governor Andrew Bailey and the Monetary Policy Committee may need further signs of a cooling in inflation before it moves decisively to cut headline borrowing costs once more, although lower oil and gas prices (and thus energy price caps), a higher pound and softer economic activity thanks to tariffs and trade wars could all provide encouragement in this respect in the second half of 2025 and beyond. Marshall's share price may well respond to the prospect of such monetary stimulus long before sales and profits start to motor.
In the meantime, we must wait, and the balance sheet enables us to do so. Admittedly, there is relatively little asset backing in the business, given how more than 80pc of the £661m in net assets are intangible. But net debt is relatively low, even including pensions and leases, and interest cover is still around four times, even using the downgraded forecasts for this year.
Questor says: buy
Ticker: MSLH
Last share price: 203p
Update: Shaftesbury Capital
We went looking for trouble at Marshalls and found it, but another contrarian pick has maybe just started to go our way. Real estate investment trust (Reit) Shaftesbury Capital also had a share price chart that went from the top left of the screen to the bottom right when we first studied it, but in this case we have accrued a one-sixth paper gain with 3.5p a share in dividends on top. This week's interim results suggest there could be more to come.
The owner of large chunks of Chinatown, Soho, Carnaby Street and Covent Garden pointed to another increase in the net asset value (Nav) of its property portfolio, thanks to higher rents, increased letting activity and lower vacancies. That Nav was also underpinned by the Norwegian sovereign wealth fund's swoop for a 25pc stake in Shaftesbury Capital's Covent Garden assets at a cost of £570m this spring.
The Reit's shares still trade at a discount to Nav of more than a fifth and further asset growth looks possible. As with Marshalls, interest cuts would also be helpful for both the underlying business and sentiment toward the shares. Lower borrowing costs can boost economic growth and reduce the company's interest bill on its debt, while a lower return on cash can also make the dividend yields offered by Reits look relatively more attractive.