To put the scale of the earnings upgrade of nationwide building services contractor T Clarke (CTO:112p) into context, the company’s earnings beat for the 2018 financial year outperformed house broker N+1 Singer’s original earnings per share (EPS) estimate by almost a third. Full-year underlying pre-tax profits and EPS increased by almost a quarter to £8m and 15.4p, respectively, on annual revenues up 5 per cent to £326m.
Moreover, buoyed by a record order book of £430m, and an operating margin that improved from 2.3 to 2.7 per cent in 2018 and is set to hit the board’s 3 per cent target this year, analyst Greg Poulton at N+1 Singer has pushed through yet another upgrade by lifting his 2019 pre-tax profit estimate by 8 per cent to £9.3m. On this basis, expect EPS of 17.5p and yet another double-digit hike in the dividend per share to 4.4p. I would flag up that 95 per cent of N+1 Singer’s 2019 revenue estimate of £340m is covered, giving a high degree of visibility to this year’s profits. Almost half of the broker’s 2020 revenue forecast of £360m is covered, too, which de-risks the investment case even further.
The reason why business is booming is because the well-funded company (net cash of £12.4m on the company’s debt-free balance sheet equates to a quarter of TClarke’s market capitalisation of £51m) has a reputation for delivering value and high-quality work on technically advanced projects, so it is increasingly seen as the partner of choice for commercial property developers and one that will be around to see a project through to completion. Around 95 per cent of the customer base on the 637 projects TClarke is currently working on can be classified as blue chip. These include the five-star Peninsula Hotel in Mayfair, James Dyson’s new research and development campus in Wiltshire, and the new art and design campus at Bath Spa University. The fact that 88 per cent of revenue comes from repeat customers speaks volumes.
It’s also realistic to expect the order book to continue to grow. Chief executive Mark Lawrence informed me during our results call that the company has a raft of tenders out on new projects including £30m of work being bid for on the former US Embassy in Mayfair, a potential £30m fit-out on Apple’s new London headquarters and a £20m tender on the Westfield Croydon Shopping Centre. The list goes on, and on.
Indeed, there isn’t a shortage of business in TClarke’s core London and south east England markets that accounted for 60 per cent of last year’s revenue. For example, there is currently 11.8m square feet of prime commercial space under construction in London where TClarke is working on some high-profile developments including London’s Kings Cross Project that will be the home to media giant Google. The increasing number of technologically advanced projects that are now being constructed vindicates the board’s strategic decision to target high-margin work on intelligent buildings. Indeed, revenue from this activity trebled to £43m in 2018 and represents 14 per cent of the current order book.
Moreover, TClarke is sensibly targeting geographic regions where it sees an opportunity to capitalise on its strong long-term relationships with partners who have moved into these areas. For example, last year the company opened new offices in Liverpool and Manchester. It makes sense to target new regional markets in this way as TClarke’s financial strength and reputation, allied to the quality of work and integrated service offering, means that the company can offer partners the confidence they need when they are looking to build their projects.
Not surprisingly, investors have been cottoning onto the good news story which is unfolding here. Indeed, the share price has risen by a quarter since I highlighted the investment case, at 90p, in my December Alpha Report (‘Profit from a buoyant earnings cycle’, 7 Dec 2018). The rerating and earnings upgrade cycle look far from over, which is why I am raising my target price from 141p to 150p to reflect the latest upgrades. My new target is not only fully warranted by current year forecasts, but also predictions that TClarke can deliver almost £10m of pre-tax profit on revenue of £360m in 2020 to produce EPS of 18.6p and support a 4.8p a share dividend.
Trading on price/earnings ratio of 6.5 for the 2019 financial year, and underpinned by a current year prospective dividend yield of almost 4 per cent, I continue to rate TClarke’s shares a 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 onwww.ypdbooks.com.
