T.Clarke - Constructing The Future?

7th Feb '11 by 10 Value 10

2 comments 7446 reads

T. Clarke (LON:CTO) is a building services group that has the look of a good discount in it. Unlike Gleeson (LON:GLE), Clarke does not build houses or acquire strategic land. The current share price of 93p (as at 1 February 2011) gives the company a market value of £38m. Based upon the 2009 basic EPS of 10p, this represents a PER of 9x. The Company is listed on the Main Market.

In the past five years, the shares have hit a high of 265p (May 2006) and a low of 91p (Jan 2011). A peak-to-trough fall of 65%.

I do not own any shares in CTO at the time of writing.

Background

The Company can trace its roots back to 1889 and listed on the LSE in 1946.

The Company acts as main contractor,subcontractor or specialist contractor on a variety of building projects in a wide range of industry sectors, including retail, education and commercial. For example, the Company acted as Principal Contractor on the new Westfield Shopping Centre.

The Company is made up of 13 group companies, trading from 14 locations and has over 1,300 employees.
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In the Annual Report, the Company provides an analysis of key KPIs (eg turnover per employee) compared to selected (their selection!) competitors and comes out quite favourably, which is positive. However, the Company's average operating margin over a 10 year period is about 5% (my calculation) which is probably there or abouts in the construction industry, but shows that there is not much fat to cut away when times get tough.

The strategic focus of the Company appears to be: concentrating on particular sectors, tight cost control, harmonising the 'T Clarke' brand and strategic acquisitions as they arise (eg acquisition of D&S in March 2010 for £12m and DG Robson in August 2010 for £6m).

Risks & Challenges

the new CEO, albeit a T.Clarke "lifer", has been in situ for only a year or so. Does he come with a new broom? A new FD (the previous FC) was appointed in August 2010
the construction industry is a tough place to be at the moment
bad debt risk from customers - eg bad debts increased by £1m in 2009 due to…

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marben100

12th Feb '11

Hi 10V10,

Our paths cross again! Missed this article originally, as I was busy on other matters but noticed it in the excellent Stockopedia weekly newsletter.

As it happens, I took a "punt sized" position in these when they first hit 98p, for my high-yield subportfolio (having been briefly invested previously but exiting when it appeared that "trouble was brewing").

I can't see any moat or margin of safety to give me reassurance.

I'm not surprised that you can't, because the 2009 R&A is awful in that regard - and one forms the impression that CTO is just another building services group - yawn. However, if you go back to the 2008 R&A, you'll find:

T.Clarke plc is the UK’s oldest electrical contractor.

Our reputation in the market today is for constant innovation

and for the consistent quality needed to bring jobs in on

time and find new ways to add value. We have a nationwide

network, with major operations in London and across the

country from Aberdeen to St Austell.

T. Clarke is one of the UK's largest electrical contractors and hence fills a niche that would not be easy for an "upstart" to invade with all the skills, scale and client relationships CTO has built up over the years. That's their moat.

IMO times are going to be tough for them for a few years, but with a sound balance sheet and prudent management they should survive, whilst weaker competitors fall by the wayside.

I have only taken a punt, on the assumption that the dividend will be maintained at the interim level, i.e. 8.5p p.a. However, this is far from certain - hence a punt only. Once the 2010 accounts are out (18th March), I will reassess. I will be focussing on free cashflow and balance sheet soundness, as well as the company's outlook statement and comments regarding dividends.

IMO free cashflow (i.e. operating cashflow after tax less sustaining CAPEX) is a sounder basis to assess earnings quality than earnings numbers - it's harder to "fiddle".

Best regards,

Mark

10 Value 10

13th Feb '11

Hi Mark

It's going to be interesting to see what the full year results bring and I agree that the focus needs to be on cash, cash, cash.

It all looks cheap by most measures, but I'm nervous about the revenue recognition/profit generation on construction contracts (have been bitten by a contractor before), particularly with new management in place. Strong free cashflow should give some comfort.

Hope the punt works out!

10V10

T.Clarke - Constructing the Future?

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