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On solid foundations

A building services contractor has a robust order book and will report a decent first-half profit
June 1, 2020

Building services contractor TClarke (CTO:100p) reported a robust £408m forward order book at its annual meeting, and there has been very little slippage or cancellations, especially in the regions. The order book is £5m higher than at the start of the year and equates to 1.2 times 2019 turnover of £335m. TClarke has tenders out for several new opportunities, too. Importantly, having achieved its 3 per cent operating profit target last year, profitability has been maintained on the £70m of revenue booked in the first quarter of 2020.

Of course, the Covid-19 outbreak has led to an enforced shutdown of many of the group’s projects since the end of March. Revenue in April declined to £10m. However, the business is still expected to break-even in the second quarter and deliver a first-half operating profit of £2m. Sensibly, the board has implemented cost-saving measures – headcount reductions, integration of central services and management structures – to cut annual overheads by £4m, of which £2.4m will be recognised in the current financial year, at a one-off charge of £3m. There are not many companies that can adapt to a sudden sharp fall in budgeted revenue and still break even, but TClarke is one of them.

It’s worth noting that net cash is around £4m and the board has ample financial headroom, having recently extended the group’s £15m revolving credit facility to August 2024 and renewed its £10m overdraft facility for another 12 months. TClarke comfortably passes all bank covenant tests under the possible scenarios modelled and the directors don’t expect to use any of the government-backed loan schemes. In fact, such is the robust state of the balance sheet, the board will pay out the final dividend of 3.65p a share on 17 July as planned. The 2019 annual dividend was hiked 10 per cent to 4.4p a share and is covered four times by net earnings.

Furthermore, with the UK government lockdown being relaxed, three-quarters of TClarke’s sites should be operational this month. True, the new protocol on social distancing will impact on site productivity levels and we will have a clearer view when half-year results are released on 21 July. However, what is clear to me is that the business is well placed to deliver on its resilient order book and win new awards, too.

So, although 2020 pre-tax profits will fall short of the £9.2m reported last year due to the UK lockdown, this is more than reflected in a share price rating of five times historic net earnings. Indeed, if TClarke delivers a second-half operating profit of, say, £4m (this is not management guidance), then the group is being valued on a miserly 6.5 times operating profit to enterprise value, a low rating for a business targeting high-margin and resilient areas of the construction sector (high-tech buildings and data centres).

The shares have risen 25 per cent since I last rated them a buy (‘Built for recovery’, 23 Mar 2020), and have delivered a 17 per cent total return (TR) since I initiated coverage in my December 2018 Alpha Report, during which time the FTSE SmallCap (ex-investment companies) TR index has shed 10 per cent of its value. Expect the outperformance to continue. Buy.

 

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