It’s not often you get the opportunity to buy shares in a UK-focused company on a PE ratio of six when the business is set to deliver full-year earnings per share (EPS) growth north of 20 per cent, and is predicted to post another double-digit increase in 2019. The cash-adjusted earnings multiple is even lower still when you take into account a solid cash-rich balance sheet.
However, this is the compelling investment prospect on offer at T Clarke (CTO:110p), a nationwide building services contractor based in the heart of the City of London that designs, installs, integrates and maintains the full range of mechanical and electrical services and the digital infrastructure required to create a 21st century building. Founded in 1889, and having listed its shares on the London Stock Exchange in 1948, the company may be under the radar of investors, but its 130th anniversary is set to be a vintage one.
Indeed, a recent pre-close trading update not only revealed that operating profit rose by 17 per cent to £8.6m on revenues of £320m in 2018 and on a better margin of 2.7 per cent, up from 2.3 per cent in 2017, but the company is on track to achieve its medium-term margin of 3 per cent, too. Also, T Clarke ended the 2018 financial year with a record £411m order book, £290m of which covers 88 per cent of house broker N+1 Singer’s £330m revenue estimate for 2019. So, with margins improving, and turnover set to rise by around 3 per cent this year, expect operating profit to increase to £9.4m in 2019 to propel EPS up from 14.7p to 16.3p.
Moreover, the company has a healthy balance sheet, with net funds of £12.4m equating to 30 per cent of T Clarke’s market capitalisation of £42m. This means an operational business forecast to make operating profit of £9.4m in 2019 is effectively being valued at £30m, a bargain basement valuation. The bumper cash pile and rising profits is good news for the dividend as analysts predict a payout per share of 3.7p in 2018, rising to 3.9p in 2019.
Importantly, the company’s strong financial health places it in pole position to continue winning complex project contracts as a trusted partner with a reputation for delivering value and high-quality work. Projects T Clarke has worked on recently include Bloomberg’s London HQ, London’s Kings Cross Project that will be the home to media giant Google, and the huge Westfield London Shopping Complex.
Specifically, activities involve designing and valuing engineer systems, drawing on an innovative approach and technological expertise to provide intelligent building solutions; adding value through procurement of the necessary materials, services and expertise across the life of a project; and deploying a team of over 1,000 highly qualified and experienced in-house engineering professionals and operatives to install and deliver its solutions and services.
I really like the investment case which is why I highlighted the company’s potential at the end of last year in my December Alpha Report when the price was 90p (‘Profit from a buoyant earnings cycle’, 7 Dec 2018). In fact, ahead of what will be a bumper set of annual results on Tuesday 26 March 2019, I maintain my 141p target price and rate T Clarke’s shares a strong buy. Even if that target price is achieved the shares would still only be rated on the sector average PE ratio of 8.2 for 2019. There is a very strong case to be made that a premium rating is warranted. Strong buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
