T Clarke (CTO) – why the sharp share price drop post H1 results?

Wednesday, Aug 09 2017 by
6

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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My opinions only, not investment recommendations: Please Do Your Own Research

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TClarke plc is a United Kingdom-based building services company, which delivers electrical, mechanical, and information and communications technology (ICT) services. The Company provides electrical and mechanical contracting and related services to the construction industry and end users. Its geographical segments include London and South East, Central and South West, the North and Scotland. The Company's businesses include Intelligent Buildings Green Technologies, Facilities Management, Transport, Mission Critical, Manufacturing Services, Residential & Hotels, M&E Contracting and Design & Build. The Company within its M&E contracting business has capabilities in sectors, including commercial offices, retail, education, healthcare, financial services and media. Its Manufacturing Services business includes in-house precision prefabrication and engineering services. Its projects include Beckley Court, Chiswick Park, Kettering Hospital, Project Nova, Mitie Care Home and Rathbone Square. more »

LSE Price
118p
Change
-1.3%
Mkt Cap (£m)
50.8
P/E (fwd)
6.5
Yield (fwd)
3.9

Morgan Sindall Group plc is a construction and regeneration company. The Company operates through various divisions, including construction and infrastructure, fit out, property services, partnership housing, urban regeneration and investments. The Company's construction and infrastructure division provides specialist construction and infrastructure design and build services on projects, frameworks and alliances. The Company's property services division provides strategic asset management and responsive, planned and cyclical maintenance to social housing providers; facilities management services to public buildings, and claims and reinstatement repairs for insurance providers. The Company's partnership housing division focuses on the delivery of mixed tenure regeneration partnership housing schemes, design and build of homes and planned maintenance and refurbishment. The Company's urban regeneration division works with landowners and public sector partners. more »

LSE Price
1136p
Change
1.1%
Mkt Cap (£m)
516.6
P/E (fwd)
7.5
Yield (fwd)
5.0

Costain Group PLC is a technology-based engineering solutions provider. The Company offers consulting, project delivery, and operations and maintenance services. The Company operates through two segments: Natural Resources and Infrastructure plus Alcaidesa in Spain. The Infrastructure segment operates in the highways, rail and nuclear markets. The Natural Resources segment includes the Company's activities in water, power, and oil & gas markets. The Company offers a range of services, including advisory and concept development, specialist design, program management, project delivery, technology integration, and asset optimization and support. The Company offers services across whole life cycle of its customers assets in energy, water and transportation business areas focused on the United Kingdom market. more »

LSE Price
169.6p
Change
0.2%
Mkt Cap (£m)
183
P/E (fwd)
5.4
Yield (fwd)
7.4



  Is LON:CTO fundamentally strong or weak? Find out More »


3 Posts on this Thread show/hide all

matylda 9th Aug '17 1 of 3

Thanks Edmund, much appreciate the detailed update and breakdown.

I am tempted here too, considering an Entry with a technical Stop below the May low at 70p - E.g. get out quick if wrong - Finger still hovering!

Thanks again.

Blog: Briefed Up
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Ramridge 9th Aug '17 2 of 3
1

Hi Edmund - This is one of few momentum plays this year that I got wrong. I sold out yesterday taking a 7% loss when I was expecting better figures.

Generally the results were pedestrian, when the market (me for one) was expecting a lot better.
- underlying eps growth 7% ; underlying operating margin -10% were not exactly heart warming.


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Effortless Cool 9th Aug '17 3 of 3
1

Good article, Edmund. It is worth noting that n+1 Singer actually upgraded their EPS forecasts slightly on the back of these results, to 12.1p for 2017 (from 11.9p) and 13.2p for 2018 (from 12.4p).

The results were a slight anti-climax, and the Central and South-West figures continue to demonstrate that CTO tends to be accident-prone. However, if the other regions merely duplicate H1 in H2, and Central and South-West can be brought back to breakeven, the full year results will look good.

On balance, I consider risk here to be skewed to the upside and added yesterday.

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