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TClarke’s reports robust start to 2019 financial year

The building services contractor is set for another double-digit increase in profits this year buoyed by a growing order book and rising operating margins
May 16, 2019

Nationwide building services contractor T Clarke (CTO:128p) has announced a near 10 per cent year-on-year increase in its order book to £403m in the first four months of the 2019 financial year, and the directors report they are seeing “no lack of [contract] opportunities across all markets in which we operate.”

That’s hardly surprising given that the well-funded company (net cash of £12.4m at the end of 2018 equates to 22 per cent of TClarke’s market capitalisation of £55m) has an enviable 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. Around 95 per cent of the 637 projects TClarke is working on are for blue chip clients including James Dyson’s new research and development campus in Wiltshire and London’s Kings Cross Project that will be the home to media giant Google. Importantly, the company only bids on projects that meet its internal risk analysis.

Moreover, buoyed by a high quality order book, TClarke’s management team have reiterated their 3 per cent operating margin target and are comfortable of achieving upgraded market expectations (following analyst upgrades in March 2019) which point to annual cash profits rising from £9.5m to £12.1m on revenues of £340m in 2019. On that basis, expect both pre-tax profits and earnings per share (EPS) to rise by 16 per cent to £9.3m and 17.5p, respectively, which is rather good news for another hike in the payout. In fact, analyst Greg Poulton at house broker N+1 Singer is pencilling in a 10 per cent rise in the 2019 dividend per share to 4.4p.

Interestingly, TClarke has recently established a new subsidiary to tender for work in Western Europe and specifically for technologically advanced projects for multi-national clients. Mr Poulton rightly points out that this could be a significant opportunity given that data centre projects are often worth between £25m to £30m in revenue alone, thus providing upside to forecasts in later years.

Investors are warming to the strong earnings momentum story unfolding here which is why TClarke’s shares have produced a total return (including dividends of 3.34p a share) of 41 per cent on an offer-to-bid basis in the five months since I first advised buying at 90p in my December Alpha Report (‘Profit from a buoyant earnings cycle’, 7 December 2018). The shares are also up 14 per cent since I reiterated my buy recommendation, at 112p, when I covered the annual results in March (‘TClarke’s bumper earnings upgrades’, 27 March 2019). I took the opportunity at the time to upgrade my original target price from 141p to 150p, having taken into account the robust and growing 2020 order book and expectations that the company is now on course to deliver almost £10m of pre-tax profit on revenue of £360m next year to produce EPS of 18.6p and support a 4.8p a share dividend.

Trading on a modest price/earnings (PE) ratio of 7.3 for the 2019 financial year, and underpinned by a 2019 prospective dividend yield of 3.4 per cent, my 150p upgraded target price could yet prove conservative. Strong buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his previous 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.