In a pre-close trading update, nationwide building services contractor T Clarke (CTO:116p) has confirmed that full-year underlying operating profit will increase from £8.8m to £10m and the company will achieve its targeted 3 per cent operating margin.
This is consistent with the guidance that finance director Mr Mitchell and chief executive Mark Lawrence gave me at the time of the half-year results (‘TClarke’s £1bn tender pipeline points to valuation anomaly’, 1 Aug 2019) when I last rated the shares a buy, at 105p, having initiated coverage in my December 2018 Alpha Report, at 90p, and subsequently banked 4.09p a share of dividends (‘Profit from a buoyant earnings cycle’, 7 Dec 2018). On this basis, new house broker Cenkos Securities expects 2019 pre-tax profit to rise from £8m to £9.3m on revenue of £340m to deliver earnings per share (EPS) of 17.7p and support a 10 per cent hike in the well-covered dividend of 4.4p a share.
TClarke’s current order book of £361m is only slightly below the level when the company reported its half-year results in August, a robust outcome in my view. Moreover, it includes £232m work scheduled for 2020, up from £180m in early August 2019, thus providing 68 per cent revenue cover for 2020, the same level as at this stage in 2018. Cenkos’s 2020 pre-tax profit and EPS forecasts are identical to its 2019 forecasts, although analyst Kevin Cammack expects a continuation of the board’s progressive dividend policy, pencilling in a 2020 payout of 4.7p a share. The forecast 2019 closing net cash pile of £9.8m (23p a share) is expected to rise to £10.4m (24p a share) by this time next year, implying that the shares are not only being modestly rated on a current year price/earnings (PE) ratio of 6.6, but the cash-adjusted forward PE ratio is only 5.2 for 2020. The 2020 payout equates to a prospective dividend yield of 4 per cent.
I maintain my view investors’ misperception over TClarke’s trading prospects has created an investment opportunity to exploit. That’s because the company’s push into high-margin data centre work in Europe, strength in regional commercial markets, and expertise in the high tech and high margin segment of the London office market means that its business is far more resilient than some investors may perceive. Although it’s difficult to call the outlook for the London office market further out given the shadow of Brexit, I would flag up that recent demand growth for tech space plays into the hands of TClarke given it is a leading contractor in this specialist market. I also believe that the certainty a Conservative majority parliament at next week’s general election would be viewed favourably by investors. I would add, too, that TClarke has an historic win rate of between one-in-three to one-in-four on tenders, indicating a sizeable opportunity in the £1bn tender pipeline it outlined at the time of the half-year results.
The holding has produced a total return 30 per cent since I initiated coverage 12 months ago, and offering a further 29 per cent upside to my maintained 150p target price, I rate the shares a buy ahead of the annual results. Buy.
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