LON:CTO | TClarke (CTO) - Overlooked Intelligent Building Provider?

21st May '18 by drvodkaquickstep

5 comments 4987 reads

T Clarke – the 2018 Annual General Meeting
Ticker ($CTO.L) – Full Market Listing (FTSE Fledgling)
Share price 85.5p (market cap £36m approx.)
Book value £16.5m approx. / EV £24m approx.

I was pleased to attend on Friday (18th) my first AGM for T Clarke (CTO), a UK based building services and information / communications technology (ICT) business that has been in existence since 1889.

http://www.tclarke.co.uk/

http://www.tclarke.co.uk/images/uploads/documents/TClarke_Annual_Report_2017.pdf

I have been aware of this business for a number of years given my engineering background but have only recently invested after it was flagged to me by another value investor who suggested I might be interested.

Having reached the giddy heights of 291p in 2005 during the last property boom the share price sank to sub 40p by late 2011 and has very slowly recovered to the current £36m valuation (85.5p) albeit with some ups and downs along with way.

AGM Trading Update
This was fairly impressive, but investors may have been a little disappointed with the PBT expectation of £7m and adjusted earnings per share of 13.2p, which are about the same as 2017. Also revenue is anticipated to be lower than 2017 at £300m.

Nevertheless, the order book has jumped significantly to £368m from £337m since December and half of 2019’s revenues have already been secured along with a decent chunk of 2020 revenue.

The directors are optimistic: “we are seeing no lack of opportunities, but we maintain a strict policy only to bid for projects that meet our internal risk analysis and where we are comfortable with the covenant and market reputation of the contractual counterparty.”

Investors may be concerned that the company is heavily dependent on prestigious office building work in London. From reviewing the list of projects won in the last six weeks it is clear that TClarke are equally orientated to medical/research lab/hospital work (e.g. Royal Orthopaedic Hospital, Royal Cornwall Hospital) and then there are schools, universities (St John’s Durham), manufacturing facilities (Rolls Royce Derby, BAE systems) and data centres (Virtus Data Centre, Slough).

The trading update finishes with an optimistic flourish, “TClarke has made an excellent start to the year and the Board looks to the future with continued confidence”. My impression from our conversations is…

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Effortless Cool

21st May '18

Thank you, Dr vq, for a very useful write-up. I share view that T Clarke (LON:CTO) is due a rerating, but then I have thought that for about two years and it still hasn't happened yet.

One favourable factor to consider is that all three drivers of the pension deficit are moving in the right direction for the employer, and the large deficit is likely to shrink very materially over the next couple of years: the 10-year interest rate is rising, increasing the discount rate; the inflation rate is falling, reducing pension increases; and mortality is improving at slower rate than expected, reducing the duration for which pensions will to be paid.

matylda

Excellent - Thank you for taking the time to provide such excellent comment, much appreciated.

Wimbledonsprinter

23rd May '18

Dr Vodka

Thanks for the excellent and accurate write-up of the AGM. I was there (also my first AGM, having recently bought the shares) but sadly not as diligent as you. As a shareholder, I naturally view the shares as undervalued, particularly given the highly visible short-term outlook. The only points I would add are:

1). There were only around 11 million proxies voted (so less than 1/3 of the shares.). Unfortunately, no idea was given of the number of shares in the room - but there only appeared to be PIs present. I thought this was a surprisingly low number of proxies but maybe reflects the low institutional shareholding.

2). My perception was that the Chairman (McCusker) had a defensive attitude - he seemed intent on giving as little away as possible in his answers. The executives were noticeably more forthcoming in their replies.

3). For my taste for a <£40 million market cap company, the AGM was a bit too high-end. I have no idea how much it cost to host, but it was not done on a shoestring.

4). In reply to a concerned question about the pension deficit from a pensioner, Lawrence (CEO) and Crowder (MD) said they were part of the same scheme.

5). The targeted increase in the operating margin should be helped by the diversification away from the traditional M&E business, where margins are tightly controlled by the power of the quantity surveyors.

drvodkaquickstep

25th May '18

Hi Wimbledonsprinter / John

Really appreciate the feedback from you both.

I agree with your point re: the Chairman and it reminds me of the AGMs for SWP Group that I used to attend where they had a dominant Chairman. I would rather he let the CEO and FD play an equal part without having to wait for the chairman’s prompt. As he joined in 2009 I am hoping he will be replaced by the next AGM. I think the new FD came across very well.

Also agree in part re: the AGM format although in fairness there were 20+ attendees so it needed a decent size room.

Margin improvement will play a key part in the rerating of the shares. It’s clear the CEO will not buy revenue and he is focussed on margin improvement via their diversified service offering.

Revisit again in a few months time.

Beginner

5th Jun '18

Excellent commentary DrV. Thank you. I am a long term holder. Just thought I would chip in as my nephew served his apprenticeship with T Clarke (LON:CTO) . He could not praise the company and its work highly enough, even after 25 years in the business and several shifts away. The problems a couple of years back stemmed from work carried out by a company they took over. Contractors, and architects, still send for 'Tommy Clarke' when they have problems that need solving on site. My one reservation here is that management may lack a bean counter or two, to watch over the finances with a beady eye.

TClarke (CTO) - Overlooked Intelligent Building Provider?

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Drvodkaquickstep

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