- First half revenue up 49 per cent to a record £206mn
- Interim pre-tax profit and EPS almost treble to £5.5mn and 10.48p
- First half dividend per share up 60 per cent to 1.25p
Business is booming for building services contractor TClarke (CTO:163p), so much so that the directors raised their full-year revenue guidance by 10 per cent to £450mn. The implication being that record first half revenue of £206mn will accelerate to £244mn in the second half.
TClarke’s record order book of £586mn is not only 10 per cent higher than at the start of the year, but effectively covers all the second half revenue as well as two-thirds of the £500mn turnover forecast in 2023. Moreover, the group has bids worth more than £1bn in the tender pipeline, and boasts a book-to-bill ratio of at least 100 per cent, so it’s reasonable to expect quarterly revenues to hold in the £100mn to £150mn range.
A key driver behind the growth is work on data centres, as highlighted by the performance of the group’s London division which delivered £5.8mn of operating profit (pre-central overheads) on an eye-catching margin of 4.6 per cent, the major contributor to the first half result.
The reason TClarke continues to win new projects over rivals is its ability to deliver contracts on time, on budget and to a high specification while offering clients substantial financial backing, too. Net cash of £7.2mn is almost four times higher than 12 months ago, and the board has raised its revolving credit facility by £10mn to £25mn (extended to 2026), while also increasing its bonding facilities to £65.1mn. The latter is a key differentiator in the bidding process given bonding facilities are used for a third of contracts.
The fact that group operating margin is holding close to the 3 per cent internal target highlights strict cost control when tenders are priced as well as simultaneously securing supplies (cables, copper and steel ducting) on signing new contracts to mitigate open risk inflationary pressures to commodity inputs. TClarke has a higher proportion of direct labour in its workforce than its peers which gives the group better control of wage costs, a key component of the cost base.
Following earnings upgrades, house broker Cenkos Securities now expects full-year pre-tax profit of £11.5mn on 37 per cent higher revenue of £450mn to deliver 42 per cent higher EPS of 21.4p. Shareholders can expect a 10 per cent higher dividend of 5.35p, too.
On this basis, the shares are priced on a forward price/earnings (PE) ratio of 7.6 and offer a prospective dividend yield of 3.3 per cent, multiples that still underestimate the growth trajectory which points to 13 per cent higher EPS of 24.2p in 2023. The rating is also low in relation to TClarke’s forecast 2023 net return on invested capital of 16.5 per cent, and 10 per cent forecast free cash flow yield. Furthermore, the rise in corporate and government bond yields has seen the group pension deficit slashed by a third to £15.9mn in the past 12 months, another positive.
TClarke’s shares have delivered a 19 per cent total return since the annual results (‘A smart data centre play’, 9 March 2022), and a 100 per cent total return since I first suggested buying (Alpha Research: ‘Profit from a buoyant earnings cycle’, 7 December 2018). My 185p target price is looking increasingly conservative. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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