A left field way to profit from a £7bn industry

Building services contractor TClarke (CTO:152p) is riding the data centre boom, the segment contributing £129mn (30 per cent) of last year’s record group revenue of £426mn, up from 12 per cent of the mix the previous year. In fact, the additional £90mn revenue from the division contributed over 90 per cent of the incremental group revenue in the 12-month period.

The rapid growth in demand for data centres is a key pillar of TClarke’s growth strategy. It is well underpinned by multiple drivers including the explosion in cloud storage from providers such as AWS, Microsoft, Google, IBM and Oracle, devices connected to the internet (IoT), streaming and gaming services, ecommerce, 5G networks, and the working-from-home revolution. Post-Brexit, the adoption of UK-specific data protection legislation has led many organisations to open or expand data centre facilities, too.

In fact, Arizton Advisory and Intelligence predicts the UK data centre market will be worth £7.2bn by 2027, up 15 per cent on 2021. Significant data centre construction locations include London, Manchester and Slough. A fifth of TClarke’s forward group order book of £555mn is focused on data centre work – it is delivering five projects as principal contractor.

The fact that 90 per cent of projects are with repeat customers bodes well for follow-on work in future phases of these projects, as does TClarke’s reputation for delivering projects on time, on budget and to an exacting specification. In addition, the group has access to £30mn of low-cost bank facilities to fund working capital as revenue scales up, as well as £65mn of bonding facilities that are used for a third of contracts, a key differentiator from rivals in the bidding process.

Healthcare and smart buildings are additional growth drivers

It’s not the only growth area as last year’s combined revenue from the healthcare sector (£47mn), large projects outside London (£37mn) and smart buildings (£7mn) increased 78 per cent. For instance, TClarke secured a contract on the second phase of the Unity Campus in Cambridge, which features three new ‘wet’ laboratory buildings of 88,000 square feet.

The group continues to win contracts on major healthcare infrastructure products, too, such as the National Rehabilitation Centre near Loughborough, one of 40 new hospitals to be built by 2030. It is also enjoying ongoing success in the education sector, delivering 76 projects last year and adding 42 new projects to the forward order book.

Improving financial position

Importantly, group finances are in rude health. Net asset value increased 46 per cent to £38.7mn (88p a share) in 2022, buoyed by 41 per cent higher closing net cash of £7.5mn and a £11mn reduction in the group pension deficit to £12.9mn on an IAS 19 basis. Moreover, a formal actuarial valuation estimates the pension deficit at only £11mn, down from £19.8mn, the reduction in pension fund obligations being driven by the sharp rise in bond yields, which lifted the discount rate embedded in financial assumptions by almost three percentage points to 4.77 per cent.

Rightly, shareholders are being rewarded with a 10 per cent higher payout of 5.35p a share covered 3.6 times by earnings per share (EPS) of 19.6p. House broker Cenkos Securities predicts a dividend per share of 5.9p this year based on £0.5mn higher operating profit of £12mn, implying the shares are rated on a modest five times enterprise value to operating profit and offer a prospective dividend yield of 3.9 per cent. The forecasts look sensible to me after factoring in inflationary cost pressures that all contractors are facing in the industry.

The holding has produced an 87 per cent total return (TR) since I first suggested buying (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018), during which time the FTSE Aim All-Share TR index has delivered only a 0.5 per cent gain. Offering a further 21 per cent upside to my 185p fair value target price, TClarke’s shares remain a buy.

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