Profits are down but this venerable small cap has still got stacks of cash.
Small cap fans who'd spurned the bumper dividend of electrical contractor T Clarke (LSE: CTO) felt vindicated last month.
Reality caught up with the sometime private investor favourite on 17 July, when it finally issued the profit warning that cautious watchers had predicted. At the same time Barry DeFalco, managing director of its UK regional operations, walked the plank.
Still, if only all profit warnings were so sanguine!
T Clarke argued its strong balance sheet -- with more than half its market capitalisation stashed away in cash -- would enable it to maintain its big dividend yield. There was even talk of share buybacks.
And with today's interims, the company has indeed maintained its payout.
Pre-tax profits are down 42% due to restructuring charges and a few bad debts, but T Clarke is still a profitable little outfit -- it hasn't lurched into a loss like so many in the sector, despite the direst property market for decades.
Better yet, the directors sound reasonably confident that the worst could be behind them.
Last in, last out
As an electrical engineer on typically big construction projects ranging like shopping centres and the 2012 Olympics, T Clarke presents an interesting dilemma for would-be investors.
You don't need to be Kevin McCloud to appreciate you can't fit electrics until the walls are up and the roof is on. This means T Clarke lags the property cycle, since it may still be working on projects long after a slowdown has hit other players in the sector.
Monitoring T Clarke over the past 12 months has therefore been a bit like watching a horror film. There, you know something bad is going to happen to the winsome teenagers who've inexplicably taken up residence in a haunted house and you've seen it happen to others, but they seen to go about their business oblivious.
Similarly, it wasn't long ago that T Clarke was talking about record profits and order books, even as the recession clearly lurked around the corner.
But today's half-yearly results how the bogeyman has caught up with the company.
Revenues fell to £95.8 million from £109.3 million a year ago, with profits falling to £3.1 million, down from £5.4 million. Earnings per share dropped to 5.3p.
Much of the profit fall is down to a (hopefully) one-off £1.4 million restructuring charge. T Clarke has got rid of two surplus regional businesses, and it's also been hit by redundancy provisions and £800,000 of bad debts. Combined, this reduced pre-tax margins from 5% to 3.2%.
Light ahead
However there's a fair bit of bright side. Of the company's £170 million forward order book, £75 million is still due for completion this year, which should support earnings over the rest of the year, assuming margins recover a bit.
And even after paying out £3.5 million in dividends, T Clarke still has £24 million in the bank and negligible borrowings.
What about the directorspeak?
Chairman Russell Race puts the focus on financial stability:
"Whilst it would be unrealistic to expect a rapid return to buoyant market conditions in our sector, I have every confidence that the underlying strengths of our business, not least the quality of our staff at all levels, will stand us in good stead during the remainder of this year and into 2010."
Chief executive Pat Stanborough sounds a little more positive. After outlining how T Clarke has addressed the over-capacity in its business, he says:
"We have however secured some important new projects and we are in discussions as preferred bidder on others. Enquiry levels are improving, the group is in good physical and financial health and is ready for an upturn in the economy."
He's not predicting a bonanza, but given the terrible market conditions it's a fairly upbeat statement.
Get paid to wait
The fortunes of T Clarke are clearly dependent on an upturn in the commercial property sector and the wider economy. Bid interest and the recovering share prices of the big listed REITS do give some cause for optimism here.
And while T Clarke was slightly caught napping by the eventual slowdown in its regional business, you'd hope a company with a 120-year history would know to get all the bad news out at first blush.
I'm therefore reasonably confident that unless the economy lurches downwards again, T Clarke should survive the next 18 months in fairly good shape. With luck, that could take it into the start of a new property boom.
Looking just to the rest of 2009, let's assume margins recover part way to 4% on the £75 million of works due. Add resultant pre-tax profits for the second half of £3 million to the £3.1 million just announced, round down, and we could be looking at £6 million for the year.
This puts T Clarke on a P/E of a little over 8, or 4 if you discount the cash pile, which seems reasonable given the lousy cash returns at present -- although obviously the company would be a far less attractive and riskier investment without it.
Buying at today's price of 130p, you get a 10% dividend yield (4.25p per share for anyone on the register on 2 September) and the possibility of a re-rating should things pick up earlier than expected.
Even if there's no recovery until 2011, going on the talk of new orders and the substantial order book already secured, T Clarke should get through all but a very prolonged slump on its cash reserves, presuming it restructured the right parts of its business, of course.
Cynics beware: Even in the most gory slasher films, there's always one careful survivor who makes it to salvation.
More share ideas from Owain Bennallack:
