- 160p-a-share cash offer and 4.5p-a-share final dividend
- Exit multiple of 6.6 times 2024 EPS estimates
- Company retains healthy net cash position
The near-10 per cent earnings yield – the reciprocal of the price/earnings ratio – on the UK small and micro-cap segment of the market is 5.7 percentage points higher than the 10-year UK government bond yield even though earnings are likely to grow over time. The pricing anomaly has not been lost on predators.
Building services contractor TClarke (CTO:161p) is the latest company on my watchlist to fall prey. The holding may have doubled in value since I initiated coverage (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018), but the £90.5mn recommended cash offer from Regent Acquisitions falls short of a fair price even if the directors are backing it with their 3.4 per cent shareholdings.
The acquirer states that the 160p-a-share take-out price equates to 11.6 times last year’s earnings per share (EPS), but it makes no reference to the fact that earnings were depressed. In fact, pre-tax profit is forecast to bounce back from £7.6mn to £17.1mn in 2024 to drive a 75 per cent rebound in EPS to 24.1p. The exit multiple is hardly generous at 6.6 times earnings estimates and TClarke has net cash of £19.3mn, a sum equating to 21 per cent of the offer price. The fact that the final dividend of 4.5p is being paid is immaterial as it’s owed to shareholders for the 2023 financial year. I would vote against the scheme of arrangement.
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