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Tapping into robust earnings momentum

A building services contractor that fits out data centres and smart buildings is converting its tender pipeline, boasts a record order book and is set to deliver eye-catching earnings growth.
Tapping into robust earnings momentum
  • First half pre-tax profit up 11 per cent to £1.9m on revenue of £138m. 
  • £110m worth of data centre projects underpins second half revenue estimates of £200m.
  • Order book up 25 per cent year-on-year to record £503m, and tender conversion rate above historic levels.

Building services contractor TClarke (CTO:133p) is primed to not only deliver a bumper second-half trading performance, but the group is converting its pipeline at such a rate that the earnings risk looks heavily skewed to the upside for next year, and beyond.

Buoyed by a record order book of £503m, of which £200m is for delivery in the second half with a further £250m slated for 2022, and a bid pipeline exceeding £1bn, chief executive Mark Lawrence sees potential for TClarke to exit this year at a revenue run-rate of £450m. Moreover, he also revealed during our results call that one of the group’s three large data centre projects (aggregate value of £110m) could bring in an extra £30-40m of revenue by the time it completes in the first half of next year. Finance director Trevor Mitchell adds that TClarke’s “long pipeline of data centre projects is worth billions and the company is actively bidding for £300m of contracts for delivery in 2022/23.”

TClarke’s environmental credentials are serving it well as property developers look to install smart technology into their buildings that 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 group has 18 such projects in its burgeoning order book. The uptick in demand for its specialist services is also being seen country wide. Lawrence highlights infrastructure (schools and hospitals), engineering services, offices and hotels as the sectors driving demand.

Factoring in a second half weighting, analysts at house broker Cenkos Securities expect full-year pre-tax profit to rise from £5.1m to £8m on 46 per cent higher revenue of £340m, and are pencilling in a step change in profits to £11m on revenue of £380m in 2022, a forecast that is increasingly looking conservative.

On this basis, expect earnings per share (EPS) to rise by 50 per cent to 15.5p this year, and increase by almost 40 per cent to 21.2p in 2022. Shareholders can also bank on pay-outs of 4.4p and 4.7p, respectively, implying the shares are priced on a forward price/earnings (PE) ratio of 6.3 for 2022 and offer a prospective dividend yield of 3.5 per cent. That’s an attractive rating for a well-funded business that is riding a UK investment boom and one that has substance. To put the undervaluation into perspective, the average PE ratio for peers is 9.7 based on 2022 forecasts.

TClarke’s shares have produced a 61 per cent total return since I first suggested buying (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018), and the share price subsequently rallied 38 per cent to a 11-year high of 159p after I covered the 2020 annual results (‘Built for the 21st century’, 16 April 2021). The profit taking since then is a strong repeat buying opportunity in my view and one that offers decent upside to my new target price of 170p. Strong buy.

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