Over the years, I haven’t got involved with too many newcomers to the market at a very early stage, that is, until the last year which has seen my being a little more active on this front.
As it stands, I have thus far seen some positive returns on the back of an early interest in both Calnex and Fonix Mobile, where each purchases were made soon after the IPO.
More recently as just last month though, I elected to take an interest in another debutant, with my picking up some shares in CMO Group at £1.56p on the opening day, which saw the shares subsequently close at a decent premium to the placing price of £1.32p.
CMO is something of a positive disruptor, which is always welcome when seeking out growth prospects, but unlike many at a very early stage of revenue generation, the company has already established itself in the market place with significant revenue now being registered.
This sees the company - which has operations in Ipswich and Plymouth - operating firmly in the online space of supplying building materials, an area that is considerably underserved.
Construction and the like is actually familiar territory for me, where as a result, I can see just why a pure online play in the sector is ripe for progress and growth, not least, as there is a huge and vast market to impact upon.
Currently, the area is as mentioned underserved and perhaps understandably so, as many of the guys I know or knew operating in the sector have by their own admission historically been very slow to embrace any kind of change.
That, so I am told by a few I still know in the industry, is now changing and fast, as a new and younger breed are coming through the ranks, who, having grown up with technology are now more than happy to conduct business on their smart phone and the like.
Enter here then CMO, a business with its early roots going back to 2008 with a business in the sector being founded by four people who were from the traditional builder’s merchant’s space.
That successful enterprise was subsequently sold to major player SIG which as a result saw the four then deciding to create something new in the online space.
Speaking with CEO Dean Murray a couple of weeks back, I heard more of the foundations on which CMO was built and how the business is both expanding and importantly, where it is heading in the future. Picking up with the four founders, Murray says that after departing from SIG they kicked the online business off with Roofing Superstore, particularly as this was an area they knew best and could expand upon.
Murray adds that they had recognised that building supplies in its current format really wasn’t sustainable going forward and they had the foresight then, of spotting where the market would ultimately head.
He does add, that IT perhaps wasn’t their forte to really expand the model, although by 2015 it had begun to spread out with more categories and verticals.
By 2017 however, Key Capital Partners spotted the potential and came on board with an £8m investment which also saw the arrival of Murray himself as CEO.
Since then, the business has grown and expanded substantially and is now very much the recognised UK online retail leader in the supplying of construction materials.
There is a vast range of some 75k products now on offer which can be delivered to customers both on-site to builders, or to the home for retail purchasers.
Although the company saw a 16% jump in revenue to £52m for full year 2020 as a private company, the CEO is keen to emphasise the opportunity that is now very much on offer for the business. “Currently only around 10% of business across the whole sector is undertaken on-line and of that, only around 4% is conducted on a pure on-line basis” says Murray. “It is way behind other sectors and is really very backward in comparison”.
Part of the slow adoption or transition to digitalisation he says comes as a result of a big barrier to entry, which includes the sheer complications of numerous products, many of which have to be compatible with others and also stored or housed correctly.
Additionally, Murray points out that there is a considerable need for back up support along with the requirement to deliver the right marketing and also manage the cost of that, particularly as many of the products are low margin.
To this end, he says that the Company’s platform, which has been ten years in the making is now ideal for execution and delivery forming the backbone of its offering, which also sees experts in their field on hand to take calls regarding issues such as installation queries. Typically, the average builder’s merchant will have an entire range of around 4/5k products Murray informs me, with even Screwfix on circa 25k products significantly lower than CMO’s 75k on offer, which arguably puts it in a good spot. In terms of supply, whereas merchants have deliveries to specific yards which are stored often not ideally, then delivered as needed or supplied in store, CMO by contrast boasts that 83% of what it supplies goes direct from the manufacturer to the end customer.
Within its own warehouses the company only holds around 1,600 items of stock which are the more frequently used products and although it is able to ensure delivery of 30% of all items ordered by the next day, Murray does add that the nature of the industry isn’t actually as time critical as others. Having now seemingly cracked the areas which restrain some would-be competitors from entering the space, CMO is now the only significant pure online player in the sector, where it is now looking to extend that and deliver substantial growth.
Going forward Murray says, “We are now in a position to provide the builder or DIY person with absolutely everything you need from building a house or undertaking a refurbishment, covering numerous end products. We have achieved that by launching seven verticals in different sectors, including insulation and tiles amongst others, the latter of which saw us acquire Total Tiles in 2020”.
Whilst organic growth is clearly very much on the agenda, so too are further acquisitions with plenty of opportunities in what is a very fragmented market place.
Murray says that typically there are many family owned businesses out there which reach a point where they are constrained for growth and ultimately have nowhere else to go.
CMO’s approach which fits the classic buy-build scenario provides such owners with a decent exit, but which also works favourably for its own group, with the CEO saying that typically they have acquired on less than 4x EBITDA.
There is no inkling as to when or in what form the next acquisition may happen or take shape, but with the firepower in place and no doubt specific targets within site, investors, or those sitting on the sidelines may wish to keep an eye out for events unfolding. Although converting a vast array of would-be customers to digitalisation may not be the easiest of tasks, to date, CMO appears to be getting it right and with an extremely strong and experienced board with connections to the highly successful G4M across the musical instrument space, then the company could be worth monitoring.
Indeed, both CEO Murray and Chairman Ken Ford sit on the board at G4M, where Ford holds the same role as he does at SDI Group.
As a pure digital play, it is not surprising that the company has moved quickly over recent years to capture new customers or retain previously converted one’s, thus stealing a march in what remains something of an archaic sector and this has been achieved via various market channels.
Looking to the future Murray comments, “We have a really big opportunity ahead of us now and we are really only just scratching at the surface at present, where we are supplying customers from three core areas.”
This, he informs me, takes in the many small builders where numbers have been increasing, along with home owners who are employing builders to undertake the work but do not wish to supply the materials and thirdly, larger customers including the likes of housing associations.
Given the spot it is operating in, CMO looks extremely well placed in a sector that is experiencing demand and which has seen many suppliers not surprisingly passing on increasing costs to the end user as inflation bubbles away.
But, what about logistics and supply issues which appears to be affecting numerous industries at present and must be problematic. “To be fair, that isn’t a new thing and it has actually been going on quite a while now, such as last year when you couldn’t get hold of plaster for love nor money” Murray says.
It is, he adds, perhaps wider now in terms of additional products, but that CMO’s vast array of what it supplies actually puts them at an advantage, as they have the ability to substitute particular items if there is an issue. The IPO saw a number of very highly respected Institutional investors come on board which appear to have a long term agenda ands horizon in terms of executing on returns, which appears to be evident given the price action thus far.
To date, the shares have performed well in the short space of time, currently at £2.10p each, which is 35% up on my own entry point, so I am happy to hold as the story should begin to really build. Looking ahead, there should soon be an initiation note from broker Liberum for some earnings guidance as CMO clearly appears to have plenty on which to build for further organic growth in a target market that is only now beginning to embrace the online format.
Aside the organic growth element, further acquisitions look sure to follow, broadening its offering and fuelling additional growth avenues.
.
Comments