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I bought shares in TClarke (LSE:CTO) in November 2015 at 79.16p, since when they have paid 13.61p in dividends. They were sold last week at 112.15p, having made a return of 58.8%.
The prompt to look for portfolio constituents to sell was the recession threat. TClarke was selected because it is a cyclically company, and therefore vulnerable to an economic downturn, sitting on an above average cyclically adjusted price earnings ratio.
A look at the company
I bought TClarke at a time when it was struggling to get over the construction industry recession following the 2008 financial crisis. Back then it had many unprofitable legacy contracts for the installation of the electrical and mechanical parts of buildings: prices in the industry had been held down by competing sub-contractors too keen to maintain turnover at the expense of margin.
The company has now somewhat insulated itself from the worst of the next downturn by providing a superior-skilled differentiated service to main contractors, e.g. installing all the gizmos for an “intelligent building”.
However, it is far from immune from a reduction in construction activity. It’s net margin at 3% is a triumph in the world of contractors (yes, that is considered a high margin in that sector) – but is worrisomely small in panicked world.
Previous newsletters on TClarke: 5th – 26th November 2015, 20th – 22nd April 2016, 9th May 2016, 19th – 22nd April 2017, 19th – 25th April 2018, 19th May 2018
Cyclically adjusted price earnings ratio, CAPE
When I bought the shares stood on a CAPE of 8.4 on the basis of reported “basic” earnings, and a CAPE of 7.3 using the manager’s “adjusted” earnings numbers. Both were well below the market average of 13 or 14.
| Pence per share | EPS (Basic) | EPS (“adjusted”) | Dividend |
| 2010 | 8.91 | 12.44 | 8.5 |
| 2011 | 9.69 | 7.34 | 3 |
| 2012 | 2.05 | 4.4 | 3 |
| 2013 | 2.51 | 4.14 | 3.1 |
| 2014 | -1.58 | 1.06 | 3.1 |
| 2015 | 0.13 | 8.16 | 3.1 |
| 2016 | 5.45 | 11.60 | 3.2 |
| 2017 | 13.44 | 12.37 | 3.5 |
| 2018 | 14.99 | 15.38 | 4.0 |
| 2019 expected | 17.50 | 17.50 | 4.4 |
| AVERAGE | 7.31 | 9.44 |
The CAPE in 2020, using basic eps is 112.15p/7.31p = 15.3, which is slightly above the market average of 14. It is by no means outrageously expensive, but at a time of fear I prefer to have cash rather than hold its shares.
Pension deficit
We can imagine one shocking turn of events that might imperil the company – the possibility it might be unable to meet its legal obligations regarding the defined benefit pension scheme. The deficit stood at £26.1m or 62p per share in June 2019. (The make-up was assets of £41.9m and liabilities of £68m).
And this deficit is set within a balance sheet that is held up by intangible assets of doubtful worth.
Balance sheet, June 2019 (market capitalisation = 42.1m shares x 112.15p = £47m)
| £m | June 2019 |
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