Description

MRL is a UK-based provider of compliance services that is an emerging buy/build compounder.  As a result of its recurring, regulation-driven services, MRL enjoys highly stable demand.  Between increasing regulatory needs as well as abilities to gain market share  from smaller players and cross-sell services, MRL is poised to continue generating HSD organic growth. In addition, MRL has 5-10% market share of its 8.4bln TAM which provides significant room for accretive inorganic growth.  As the company continues to grow, there is an organic path to GBp 1500 with downside protected at GBP 400 which seems to be an interesting risk-reward at GBp 480.

Capitalization and Valuation

MRL has 95.9mln shares for a GBP 460 mln market cap at GBp 480.  The company has 20mln of cash and 176mln of debt or 156mln net debt (1.9x run-rate EBITDA).  The company also has 28mln of IFRS Leases (included if using EBITDA) and a 25mln contingent consideration for a total EV of 669mln.  Per the H1 2023 results , run rate revenues for all closed acquisitions are 468mln (1.4x) and run rate EBITDA is 83mln (8.1x).

Both Divisions are Good Businesses

MRL operates in 2 divisions, Governance, Risk & Compliance (GRC) and Testing, Inspection & Certification (TIC) offering compliance services to over 50,000 clients, mainly in the UK.  Both divisions are good businesses because they are non-discretionary (driven by regulation) expenses that represent a small portion of their customers P&L, especially compared to the high costs of non-compliance.  As a result, 85% of MRL's revenue is recurring. MRL also benefits from sticky customer relationships with an average duration of over 12 years as there are material costs and risks for a customer to change a compliance service provider.  Both divisions have strong margins and solid organic growth prospects.

GRC- ~57% of pre HQ EBITDA

GRC provides consulting and software solutions to mitigate business risk and ensure legally compliant government services.  These services include Health & Safety, Employment Law/HR, Occupational Health and Compliance Software and are generally delivered as 3 or 5 year contracts with subscription-based revenues.



Most of these services are legally required and MRL's services generally reduce their clients risk and saves them the cost of non-compliance.
 
GRC also includes a significant software component with over 39mln of ARR in software that has net retention of >100% and is ~25% of total MRL EBITDA.  MRL targets at least 50mln in software ARR by FY 3/24.

GRC's markets should generate high-single digit organic growth and the company expects to take market share as a result of its scale and abilityt to cross-sell various solutions to the same decision-maker.  GRC also enjoys high profitability, historically generating 25% EBITDA margins with a mid-term target of 30% as the company continues to optimize costs and software becomes a larger portion of the revenue mix.

As a result of its sticky, non-discretionary, growing, high-margin revenue, I believe GRC is an excellent business.

TIC- 43% of pre HQ EBITDA

TIC is a route-based business that provides testing and certification for fire safety, water quality and air hygiene.  One again, these businesses are driven by regulation and feature sticky client relationships.




TIC is the market leader in water and air and is #3 in fire in very fragmented markets (<10% market share).  It's markets should grow at a low-mid single-digit rate and TIC expects to continue to take share from smaller, less well-resourced players.
 
EBITDA margins are currently ~14% and expected to increase towards 20% as a result of route density.  On average TIC receives roughly GBP 600 per fee earner per day but in its densest routes, fee earners achieve ~700 per day and that incremental revenue  has a high flow-through to the bottom line
 
While lower growth and less profitable than GRC, I believe TIC is a strong business due to its sticky, non-discretionary revenue.

M&A

M&A is a key part of the MRL strategy.  The company believes there is room for consolidation in all their markets as they generally have between 5-10% market share in fragmented markets with a large proportion of smaller privately-owned businesses.  The company has a central M&A team of 8 employees that seeks deals with a focus on off-market transactions which represent the vast majority of the deals (86% per the presentation below from June 2021)

Integration is handled by the existing integration teams at each of the 6 business units which gives the company room to pursue multiple deals at the same time.  Integration generally involves exiting the senior management and back office of the acquired company, closing redundant locations and employees, and moving the company onto MRL's IT platforms.  MRL also believes that it is able to improve customer retention at acquired businesses due to their greater capabilities and higher quality operations. 



During the 2022 CMD, they noted that they have acquired at a 7.8x multiple pre-synergies which is comprised of closer to 5x for the smaller bolt-ons and higher multiples for the larger, platform businesses where its closer to 9x for TIC and 10x for GRC.

In H1 2023, MRL made 10 bolt-on acquisitions using 44mln of capital at an average, pre-synergy multiple of 6.8x.

Management

MRL was started as a cash shell by Alex Dacre.  Before starting MRL he worked for former Conservative party treasurer and billionaire financier Lord Michael Ashcroft (12% MRL shareholder) in M&A at listed companies Impellam and Restore.  In 2015 at the age of 27, Dacre approached Ashcroft to start up his own listed vehicle and founded MRL and has built it to almost 500mln of revenues over the ensuing 7 years.

Dacre takes a below market salary but the senior management team receives a 10% share of total shareholder return above a 10% hurdle from GBp 690 that will be paid in shares with a maximum dilution of 5%.  Based on the 10% hurdle, the stock must be at 1,110 by 4/1/26 for the incentive plan to have any value.

Management has bought shares multiple times this year including a few times in the last couple of weeks post the earnings announcement.  Dacre owns 5% of the company.

Upside

The critical drivers for MRL are continued organic growth, margin expansion and M&A.  The company has guided to FY 3/24 revenues of 500mln and EBITDA of 100mln which represents ~11% growth and 240bps of margin expansion from current levels and which they have noted they expect to achieve "materially  ahead of the original FY24 (March) target" .  With HSD organic revenue growth, 500mln should be achieved on an organic basis and with 18% run-rate EBITDA margins they are very close to the 20% target.

 



Thus, when we look out 2+ years to FY 3/25, I believe MRL has the potential for 120mln of EBITDA.

With 120mln of EBITDA at 14x, MRL should be worth ~GBp 1500 per share.  This would be a ~5% FCF yield on ~75p of FCF.  Further upside could come from continued growth and accretive M&A as well as multiple expansion.




As a note, KKR acquired GRC competitor Citation for ~18x EBITDA and scaled TIC platforms appear to achieve mid to high-teens EBITDA multiples (see API Group writeups) in transactions.

Downside

MRL's revenues are very sticky with 85% from recurring sources and an average customer life of 12 years.  Thus, I believe run-rate EBITDA should be relatively sticky.   83mln of run-rate EBITRDA is worth ~GBp 400 per share at 7x.  This is also a 12.5% FCF yield.

 

Catalyst

Continued organic growth, further M&A