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Our small-cap stock-picking expert highlights a small-cap mechanical engineering company that’s winning new orders and has eye-catching growth targets
April 16, 2021
  • Year-end order book surges 13 per cent.
  • Ambitious target to generate £500m of revenue by 2023.
  • Annual dividend maintained.

There are not many companies that have emerged from the Covid-19 pandemic with a forward order book at near record levels, but building services contractor TClarke (CTO: 115.75p) has done just that.

By focusing on five key market sectors – infrastructure, residential and hotels, facilities management, engineering services, and technologies – a company that was founded in the year that Edison was commercialising his lightbulbs patents has a bright future in the 21st century. Over 14 per cent of TClarke’s revenue is generated fitting out smart buildings including Google’s flagship 700,000 square foot new headquarters in London’s Kings Cross district.

A strong environmental, social and governance (ESG) commitment is another bull point as the UK aims to achieve net zero carbon target by 2050. TClarke’s smart buildings software can connect a building’s control systems via a ‘single pane’ to reduce energy consumption, cut operational costs, lower carbon footprint, and improve return on investment. The directors spotted the major growth opportunity in large data centres, too. There are currently 39 such projects in the UK with a construction value of £1.35bn and TClarke has live opportunities on four schemes in the South East alone.

The group is also well placed to pick up contracts on the UK government’s massive £3.7bn 10-year Health Infrastructure Plan, which will see 40 new hospital projects built in the next decade. TClarke worked on the 200-bed Nightingale Hospital in Exeter in the fight against Covid-19 and has landed a further £40m-worth of contracts in the South West. The directors have been going back to school, quite literally, targeting the UK government’s additional £1bn investment across 50 projects in the education sector.

The 13 per cent increase to £456m in the year-end forward order book, and expectations of a strong rebound in the UK economy – some economists expect 7 per cent-plus GDP growth in both 2021 and 2022 – adds considerable weight to the directors’ ambitious target of achieving £500m of revenue in 2023, a 50 per cent increase on the 2019 high-water market when the group reported pre-tax profit of £9.2m and earnings per share (EPS) of 18.8p.

Moreover, with 100 per cent of house broker Cenkos Securities’ 2021 revenue estimate of £303m already covered by contracted orders, then shareholders can expect a 50 per cent recovery in earnings per share (EPS) to 15.4p based on pre-tax profit bouncing from £5.1m last year to £8m. It’s no wonder the board maintained the annual dividend of 4.4p a share. Expectations of pre-tax profits hitting £10.6m on revenue of £385m in 2022 look reasonable, a result that delivers EPS of 20.3p and supports a higher payout, too.

TClarke’s shares have produced a 38 per cent total return since I first suggested buying (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018) and the price looks primed to run up to the 140p December 2019 high, and well beyond, having just broken out above the 114p November 2020 high. Adjust for net cash of £10.2m (24p a share) on the balance sheet and the shares are trading on bargain basement forward price/earnings (PE) ratios of six and 4.5 for 2021 and 2022. Buy.

 

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