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We’ve already established (in the last two newsletters) that TClarke’s (LSE:CTO) shares are priced low relative to earnings through the economic cycle, and that the company is unlikely to suffer from financial distress (unless things go very wrong with the pension deficit). Today I want to examine its competitive position with a particular focus on its ambition to achieve 3% operating margin on revenue.
Here’s the history of that:
| Turnover | Operating margin | ||
| 2006 | £186m | 3.6% | |
| 2007 | £194m | 4.2% | |
| 2008 | £220m | 6.5% | |
| 2009 | £176m | 4.2% | |
| 2010 | £179m | 3.4% | |
| 2011 | £184m | 2.9% | |
| 2012 | £194m | 0.9% | |
| 2013 | £217m | 1.5% | |
| 2014 | £227m | 0.6% | |
| 2015 | £242m | 2.1% | |
| 2016 | £279m | 2.5% | |
| 2017 | £311m | 2.3% |
Clearly operating margins of 3% and above are possible. Indeed, this company achieved as much as 6.5% in the favourable conditions of the last boom, just before the financial crash. In a building-frenzy customers commissioning large buildings are aware of the shortage of mechanical and electrical engineers and so are willing to pay more, especially for a market leader with a sound reputation and longstanding relationships with main contractors.
Even though not a building-frenzy, we seem to be coming into another era when TClarke’s quotation team are able to pick and choose, to some degree, what schemes to bid for, and to add on a little more margin. Mind you, the recent slip below 2016’s operating margin of 2.5% is a little worrying.
Regional margins have generally risen between 2015 and 2017:
Year to December 2015
| Revenue | Operating Margin | “Underlying” Profit Before Tax | |||
| London and South East | £129m | 1.2% | £1.5m | ||
| Central and South West | £57m | 1.6% | £0.9m | ||
| North | £42m | 4.5% | £1.9m | ||
| Scotland | £16m | 1.9% | £0.3m |
Regional numbers for 2016
| Revenue | Operating Margin | “Underlying” Profit Before Tax | |||
| London and South East | £143m | 2.4% | £2.7m | ||
| Central and South West | £68m | 1.5% | £1.0m | ||
| North | £54m | 3.4% | £1.9m | ||
| Scotland | £21m | 2.9% | £0.6m |
Regional numbers for 2017
| Revenue | Operating Margin | “Underlying” Profit Before Tax | |||
| London and South East | £178m | 4.8% | £8.5m | ||
| Central and South West | £63m | loss | -£1.8m | ||
| North | £48m | 5.0% | £2.4m | ||
| Scotland | £23m | 3.5% | £0.8m |
In London and the South East the margin has quadrupled from 1.2% to 4.8% at the same time as revenue climbed from £129m to £178m – so clearly, margin was not sacrificed to gain market share in that region: “We were able to expand our core client base and entered into direct negotiation on a number of key projects, rather than being exposed to a competitive tender”. (2017 Report)
Examples of projects: Bloomberg Place, 22 Bishopsgate (62 storeys)
According to a Guardian article last week there are 510 tall buildings (more than 20 storeys) in the pipeline for London. Over the past two years work has started on more projects than in the previous five years combined.
As an indication of the increased sophistication and complexity of buildings, projects now take 3-4 years from start to finish rather than 2-3 as before.
As well as offering a greater volume of work to the established firms, who have learnt how to cope with such high levels of sophistication, the long time lag until the second fix means that TClarke should have a pipeline of contracts for many years from the projects that are only now breaking ground.
In Central and South West the picture is not so rosy, with a pretty poor 1.6% margin in 2016 falling into losses in 2017. However we are promised in the Annual Report that this region is “expected to be profitable in the current period” as the managers have taken steps to target better quality projects, i.e. those offering good positive margins.
The turn-around has already been so good that by last December “the South West had secured all of its targeted revenue for 2018, with its strongest ever order book. We now expect the South West to perform in line with the rest of the Group.”
The other two regions have continued to perform well, with the North team leading the pack producing a very nice margin of 5%, and the Scotland team bringing an above target of 3.5%.
In another sign of confidence new offices have been opening, e.g. the Birmingham office was launched initially to support the growing Facilities Management client portfolio but has also found other opportunities, such as in new-build M&E fit-outs. TClarke
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