Marks Electrical Group

Marks Electrical (LON:MRK) 26/11/2021 £1.17

This company sells electrical goods such as fridges, tvs, cookers etc online a bit like Ao World (LON:AO.)

The company was founded in 1987 by Mark Smithson.

IPO date was on 05/11/21 with an ipo price of £1.10.

Normally I would avoid ipo’s but this has caught my attention.

First off, there are a few negatives such as:

Low EMS and illiquid due to very few free shares on the market.

The CEO, Mark Smithson owns 71% of the company.

It is in a sector unloved and a sector that struggles to make good margins.

No one has heard of Marks Electrical.

You may be asking yourself now why this has caught my interest.

Well, Marks Electrical (LON:MRK) has a different business model compared to AO and is on course to produce an 8% margin of profits while investing heavily on advertising via search engine analytics and also through tv adverts.

It currently only has 1.5% of the market because only 6% of the population have actually heard of them.

Interim results showed a 78% growth in revenues to £37m and has continued its momentum to date.

Profit making and free cash flow of £5.9m.

Warehouse has been upgraded as well as a new fleet of delivery vans with about 100 drivers employed.

They would like to try and get to a 10% share of over £5b market here in the UK.

Marks Electrical (LON:MRK) are planning on starting dividends next year.

The company is very proud of their customer service and see this as a core to their business.

So basically a growth story but one where the company is already profit making and intend to continue to be with future investments not expected to be more than a few million pounds and funded via their cash and future profits.

So having decided I was interested I had a phone conversation with the CFO Josh Egan this week.

I asked:

How is it this sector struggles, in particular AO, yet MRK are having almost double the profit margins?

AO run with 19 distribution centres compared to MRK having one central centre servicing 90% of the UK with next day deliver. No over night trunking of goods from one warehouse to another and fewer people employed.

MRK have started a third shift in their warehouse so it works 24hrs. They employ a mechanic that repairs through the night to keep fleet mobile. They also have a fuel station on site. When deliver drivers turn up at about 4:30am, the vans are loaded up with generally 15-20 orders and fuelled up so the drivers are set to go straight away.

How much capacity can your warehouse manage and would it handle 10% of the market share?

Our warehouse recently has been upgraded and now can handle about £350m, £400m tops, in revenue. So no, it could not handle 10% of the current market. We are looking for another warehouse for the future in a similar location, central England and close to the M1. This we would look to lease.

I noticed last year you had an EBITDA margin % of over 14%. You are currently running at 8.1%. Can you explain the difference?

There are several reason for this. First off, last year online search engine cost were a lot cheaper due to everyone buying online due to the lockdowns. AO even cancelled some of their analytic cost and just relied on the fact people know of them.

Secondly, this year we have increased our funding for online search so we show up on the first page of results. We have also spent on tv adverts and have a second round of tv adverts about to be run.

Thirdly, to progress the business we needed to employ more people to deal with a growing business. I (Josh) only started last April. So the business has gone from just Mark running it to additional bod and managers. Mark also previously did not take a wage, relying on just taking dividend payments. He now has a wage factored in. EBITDA margin % should increase slightly to about 9% eventually but for the moment we are working on marketing and getting brand awareness.

Do the BOD have a tying up period where they can not sell shares and will Mark likely sell shares in the future?

We have a 1 year period from the IPO date where we can not sell any shares. I myself only have a relative small holding and intend to hold long time.

Mark does not want to sell more but if he is advised by Institutes that he need to sell some to help with liquidity he will listen to them and is prepared to sell some, maybe up to 5%, but he really does not want to.

Is there likely to be any fund raising in the future?

I see no reason to do this. We are cash generative and should be able to fund any future spending. If we do get another warehouse to replace the existing one it will not be over expensive, probably a few million which we will be able to spend with our current cash.

What are your thoughts on electric vehicles?

We did try one electric vehicle but at the moment they are not viable as the battery does not last long enough due mainly to weight. When the time comes when electric vehicles have improved and become viable we will swap over to electric. I’m the scheme of things, this will not be a big expense as we already have a 3 year life expectancy for our current vehicles.

I certainly would not buy a huge amount of these due to illiquidity but I have been intrigued enough to buy a small holding to hold long term. This is just not a share tip but just highlighting a possible new company to invest in. Do your own due diligence.

I would certainly be interested on others views whether good or bad. Thanks for reading.

Gmtrader

Interview on VOX.

https://youtu.be/PfHfwrQz2Mg

5 mins talking about MRK about 15 minutes in.
https://youtu.be/4PCSEnaOMA8

Podcast interview on VOX.

https://www.voxmarkets.co.uk/articles/marks-electrical-discuss-their-growth-and-positive-outlook-4382711/

IPO document.
https://group.markselectrical.co.uk/ipo

Interim results.
https://group.markselectrical.co.uk/results

Business model.
https://group.markselectrical.co.uk/howitworks