- Order book up from £555mn to £720mn since start of 2023
- 2024 earnings forecasts point to 33 per cent pre-tax profit growth
- Infrastructure order book up £65mn in 18-week period
Building services contractor TClarke (CTO:144p) has reported a 30 per cent surge in its order book to a record £720mn since the start of the year.
Around 40 per cent of the £165mn increase reflects successful tenders in the infrastructure sector – the segment accounted for 19 per cent of group revenue of £426mn in 2022. It also reflects the increased visibility of revenue outside of London through the growth of contracted work in the healthcare sector and larger projects; the two segments accounted for a fifth of last year’s revenue. More than 20 projects outside London have a contract value of £5mn or more, where the group is either on site or the project is due to commence in 2023 or 2024.
The strong revenue visibility from the bumper order book underpins house broker Cenkos Securities’ expectations that revenue will hit a record £500mn this year. Moreover, such is the strength of trading – TClarke is also riding the boom in data centres, the segment accounting for 30 per cent of annual revenue, and smart buildings – that Cenkos has introduced eye-catching 2024 forecasts pointing to pre-tax profit rising a third to £14mn on 20 per cent higher revenue of £600mn. On this basis, expect forecast earnings per share (EPS) to rise from 18.9p (2023) to 23.9p (2024), implying the shares are rated on modest forward price/earnings (PE) ratios of 7.6 and six, respectively.
Strong balance sheet and cash generation supports growth
Importantly, TClarke has a solid balance sheet and the requisite credit lines to support the growing order book. The group has access to £30mn of bank facilities to finance working capital as revenue scales up and £65mn of bonding facilities to support contracts, a key differentiator from competitors in the bidding process.
Net cash of £7.5mn at the end of 2022 is expected to average £4mn this year and £5mn in 2024 to close the respective years at £9mn (20.4p) and £9.5mn (21.5p) after factoring in £1.1mn annual investment in plant and equipment, and dividends, too.
Indeed, shareholders can expect a continuation of the board’s progressive dividend policy as analysts expect 10 per cent hikes in the payout per share to 5.9p (2023) and 6.5p (2024), implying the shares offer attractive prospective dividend yields of 4.1 and 4.5 per cent, respectively. The cash cost of the dividend is covered more than two times by estimated net cash flow from operating activities.
Unwarranted low rating
The holding has produced an 84 per cent total return (TR) since I initiated coverage (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018), during which time the FTSE Aim All-Share TR index has shed 4 per cent of its value. However, the share price is little changed since the annual results after adjusting for dividend payments (‘A leftfield way to profit from a £7bn industry’, 8 March 2023) despite the marked improvement in the UK economic outlook since the start of the year, as highlighted by the Bank of England's upgraded GDP forecasts today. This is clearly supportive of demand for TClarke's services.
My 185p fair valuation is based on a targeted PE ratio of 7.7 for 2024 and suggests 28 per cent further share price upside. Buy.
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