- Record £781mn order book, up £195mn year-on-year
- Pipeline of current tender bids exceeds £1bn
- Revenue guidance £500mn (2023), £600mn (2024) and £650mn (2025)
- £10.7mn oversubscribed placing to support growth
- Single-digit PE ratio and attractive dividend yield
Building services contractor TClarke (CTO:132p) has reported a 33 per cent year-on-year surge in its order book to a record £781mn at the half year stage. First half operating profit of £5.7mn was slightly down on flat revenue of £207mn, but it's not a concern given the material second half weighting as the contracted order book is delivered. The directors are maintaining guidance for 17 per cent growth in full-year revenue to £500mn.
Such is the strength of trading that the group now has more than £1bn tenders in its bid pipeline, too. The boom in data centres, the segment accounted for 31 per cent of first half revenue, and smart buildings are key drivers as is growth in the London market and improved revenue visibility outside of the capital. The technology sector order book has increased 35 per cent to £248mn in the past 12 months.
Sensibly, the board has bolstered the group’s £4.5mn net cash position by raising £10.7mn in an oversubscribed placing to fund the anticipated near term contract wins. The shares were issued at 122p, a 14 per cent discount to the market price, but the directors expect the fundraise to be “significantly earnings accretive.” The only negative being that existing shareholders were not offered the opportunity to participate in an open offer, and the discount caused the share price to dip below the 144p level of my last buy call (‘Markets are harshly rating this stock’s potential’, 11 May 2023).
TClarke also has £30mn of bank facilities to finance working capital as revenue scales up and £65.1mn of bonding facilities to support contracts, a differentiator from rivals in the bidding process.
Order book and pipeline support step change in profitability
Unsurprisingly, the bumper order book and record contract pipeline support a step change in the group’s revenue and profitability in the coming years. In line with management guidance, analyst Andrew Gibb at house broker Cenkos Securities expects current year revenue of £500mn, rising to £600mn in 2024 and £650mn in 2025.
Importantly, group operating margin of 2.8 per cent in the first half of 2023 is close to the 3 per cent internal target, highlighting tight cost control when tenders are priced and securing supplies (cables, copper and steel ducting) on the signing new contracts to mitigate inflationary pressures in commodity inputs. TClarke has a higher proportion of direct labour in its workforce than its peers which provides the group with better control of wage costs, a key component of the cost base. Analysts at Cenkos believe that the group should be able to earn an operating margin of 3.1 per cent in both the 2024 and 2025 financial years.
On this basis, expect pre-tax profits of £10.7mn (2023) to rise steeply to £17.1mn (2024) and £19.1mn (2025) to deliver earnings per share (EPS) of 17.4p, 24.2p and 27.1p, respectively. The forward price/earnings (PE) ratios are 7.6, 5.5 and 4.9 across the three-year forecast period. That’s a harsh rating for a business benefiting from structural growth in higher margin market segments and government backed investment in infrastructure projects including schools and hospitals.
Furthermore, with cash generation expected to lift forecast year-end net cash of £9.2mn to £11.3mn (2024) and £16.9mn (2025), then shareholders can expect double-digit increases in the dividend per share to 5.9p (2023), 6.5p (2024) and 7.1p (2025). This implies prospective dividend yields of 4.5 per cent, 4.9 per cent and 5.4 per cent, respectively.
Outperformance of AIM
TClarke’s share price has pulled back six per cent since last week’s placing, but the holding has still produced a 71.5 per cent total return (TR) since I initiated coverage (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018). In the same holding period, the FTSE Aim All-Share TR index has fallen 11.5 per cent.
The low earnings multiple, attractive dividend yield and growth drivers, which de-risk earnings forecasts, all point towards further share price outperformance. Prospects of the group delivering an eye-catching 29 per cent pre-tax return on equity in 2024 are not reflected in a modest price-to-book value of 1.3 times either. Buy.
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