I must admit, I was initially puzzled – with the bulk of numbers for T Clarke (LON:CTO) pointing to good growth in H1 2017, why did the shares fall over 10% on the day?

First of all, what does T Clarke actually do?

It is a building services group, acting as a contractor for a whole range of construction and engineering projects. So it is a low profit margin, low enterprise value-to-sales company in the same sector as Morgan Sindall (LON:MGNS), Costain (LON:COST) and Kier (LON:KIE).

Rather than focus on the positive growth story in the H1 results, let’s examine the negatives and the potential risks.

Negative #1: Surprise drop into loss in the Central & South-West division

T Clarke is geographically split into four divisions. Three of these UK geographies performed well, with growth both in sales and profit margins.

The Central & South-West division is the exception, with a sharp drop in sales and falling into loss (-£2.2m operating profit versus +£0.4m in H1 2016), reporting a -9.3% operating margin for H1 2017.

So, this is a clear reminder of the asymmetric nature of contractors; they earn smallish profit margins when everything goes well, but can suffer big losses when contracts run into big problems or cost and time overruns.

Here is the company’s explanation for this poor regional result:

The Central and South West region has suffered from a number of delayed project starts and protracted final account settlements in the first half of the year which have impacted revenue and profit. 
We expect to see an increase in workload in the second half of the year which will recover some of the losses from the first half of the year.
However, our team has resisted entering into contracts at unacceptable margins and as a result there is still some capacity in the region and we are seeking out further opportunities to contribute to the revenue and profit.

The headline result of this shortfall in the Central & South West region is a drop in the group operating margin from 2.2% in H1 2016 to 2.0%, where clearly analysts would have expected continued recovery in profit margins on the…

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