LON:CTO | T Clarke Plc - Turnover Is Vanity, Profit Is Sanity, Cash Is Reality.

3rd Aug '15 by Dearg Doom

7 comments 11949 reads

T Clarke (LON:CTO)

Share Price 78.75p Market Cap 33m

(Disclosure I have no position in this company)

T Clarke's 6 month results expected to be released tomorrow Tuesday 4^thAugust.

Interesting to speculate before the results than rather than write up after the event. T Clarke is an UK company providing full mechanical, electrical and ICT Services operating from 16 locations in UK.

The Company’s Outlook

“With a record order book and early signs of margins beginning to improve, we look forward to 2015 and beyond with renewed confidence”

This is the type of share I would have bought in the past. Why not, electricians charge a fortune. Surely a big electrical contractor can charge what it likes. Only time is necessary for profits to expand. Profits will come back as they have done before. The company is paying a good dividend. Well know brand name. What more do I want?

Other Positive Points

Been in business since 1889. Not likely to go out of business anytime soon.
Positive share price progression over last few years. Revenue maintained and growing slowly. 4% growth in 2014
Dividend restoredto 3.1p, shows management has confidence in the future prospects.
Skilled workforce employed where their might be future labour skills shortage in times ahead
Legal cases settled, unlikely to be repeated.

Negative Points

Company has chased turnover at the expense of margins. Negative net margins last year. Low margins over many years.
Share price has gone nowhere since 2007.
Made a loss of 1.58p per share in 2014 or a positive 1.06p if you took out one-time costs.

My View Point.

I will try to be gentle as best I can. A national babysitting service would make a bigger profit margin than T Clarke. T Clarke seems to be more a price taker not a price setter. It will have difficulty delivering the full expected “jam tomorrow” in terms of profits.

For a quality branded company, it does not know how to charge for its services. I would be happier to make…

Unlock with Email

Unlock with Google

Already have an account?
Login here

janebolacha

3rd Aug '15

DD, yes, CTO has to demonstrate that it has put behind it the legacy contracts, those taken on wafer-thin margins when opportunities were scarce. Their RNS of January 22 included this statement:

"Since the Interim Management Statement made on 8 October 2014 current trading has continued in line with the Board's expectations. Looking back 2014 has been a challenging year and we maintain a particular focus on closing out projects let during the recession to secure acceptable returns"

I can understand the approach they took during the downturn, one of securing business that made at least some contribution to fixed costs and overheads while conserving the company's operating capability. That's always a very fine line to draw and your comments in your last section seem harsh, although you may have information that I don't. However, let's see what the results bring tomorrow.

(PS: I have a very small holding in CTO).

Dearg Doom

Hi Janebolacha,

Thank you for your comment.

I looked at another company North Midland Construction before completing T Clarke report . They do have some areas in common but not all. NMD has turnover nearly 200m, half the capitalisation value of T Clarke , making losses after legacy issues as well. NMD talk about economy improving, skill shortages, and challenging margins.

My take is that there are too many competing firms competing for the same businesses. Margins will continue to be tight. Skill shortages if they happen mean labour cost increases for the firms, not necessarily company profitability.

Legacy legal issues may be in the past, but they do tend to crop up on a regular basis to be an extra expense. Don't forget the cost over runs on contracts, All must come into future calculations of appropriate p/e.

Yes the last section to any casual observer reads as harsh, but it is used as a wake up call to investors to one key point, namely that investors could invest almost in any other sector with better margins and less cyclical risk.

Regards

Dearg Doom

cig

Skill shortages that all operators face tend to leak into prices sooner or later (supply and demand...)

imranawan

4th Aug '15

Would be interested to get your thoughts on the T Clarke (LON:CTO) interims. Margins as you say are wafer thin. What's more worrying is the cashflow of the company. They say the "significant" cash outflow was due to competitive projects in the recession as well as investment in head office. Nonetheless they've moved from a cash position of £10.3m at the financial year end to -£3.7m at the interim stage. Most of the outflows relate to changes in the working capital position of the company.

Imran, I found the results unimpressive, tbh. Like you, I'm surprised that cash resources are seemingly still going into contracts taken during the recession. After all, the building recession in London and the South-East ended some years ago now and, even allowing for the fact that E&M work comes in at the later stages of contract execution, I had expected that cash would be starting to be released from those contracts. I wonder whether they are having to do additional work in order to have their retentions released and that concerns me. Not wanting to risk any unpleasant surprise, I sold my very small holding this morning and banked a nice profit. I may buy in again at a later time should I feel the outlook is clearer.

Hi Imranawan,

The results were on the lower end of expected results. Depending on what profit figure you use, profit could be as low as 700K on 112 million turnover. 2 from 4 TC divisions are simply treading water and a third is losing money. TC's comment about highly competitive work coming to close. I don't sees any great profit uptick against overruns or possible legacy issues.

TC wishes to highlight from its statement that its about future turnover, named dropping projects, and no of new apprentices. TC unfortunately does not have a competitive advantage, and it operates in a crowded market of similar businesses who survived during the downtown.

I had looked at this company in the hope of hidden value. I found potholes in my investment prospect. I would definitely need to wear hard hat and shoes if choosing this share.

Better for investors who don't own shares not to waste further time on reviewing. Look for shares with USP and good margins. I am leaving T Clarke off my list to follow. Time commitments constraints

Dearg Doom

.

muckshifter

Although my experience is in Civil Engineering contracting rather than electrical, and I’ve never looked at Clarke, there are, I believe, from looking once or twice at electrical contracts many similarities between the contract forms.
They also probably have similar low profit percentages, and turn over their original capital many times during a year – ie. they are low capital businesses when purely a contractor.

The big danger for contractors as I see it, is when they become overconfident and take on one or two contracts which form a large part of their turnover on unique, untried (and often severe) contract terms – that was what did for Laing.

Without having looked, I doubt if that was the case here. If you look at Balfour Beatty’s news flow for the last two years, they have had numerous profit warnings etc, a few of which, iirc, refer to electrical contracting losses in and around London. Balfour’s losses make Clarke look successful!

But with a contractor there are a few things to remember when considering their shares. The last knockings of bad contracts are always the most painful part, but they complete, and the cash outflow ends. The contract teams then mop their brows in relief, and do their best to salvage their reputations by generating as much cash inflow from unsettled variations, extensions of contract period / overhead charges etc. as they can. The company management meantime watch the estimators like hawks and any new work won is at a better profit margin. Those three factors should result in a good rebound.

But in this case, it is worth remembering that Clarke’s biggest competitor in London, where most of the big jobs occur, was probably Balfour Beatty – still in the intensive care unit.
Regards.

T Clarke plc - Turnover is Vanity, Profit is Sanity, Cash is Reality.

T Clarke (LON:CTO)

Share Price 78.75p Market Cap 33m

Unlock the rest of this article with a 14 day trial

About the Author

Dearg Doom

7 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...