TClarke's trading update is refreshingly positive in all key aspects of investors' current COVID fears and hopes. The decision to fully pay the 2019 final dividend sustains income attractiveness (4% yield on the final alone), the avoidance of trading losses in the teeth of the industry lockdown period (after a profitable Q1/20) demonstrates resilience whilst maintenance of net cash balances through April and May illustrate a robustness of cash flows despite reduced activity levels. It has also maintained the order book and has moved quickly to re-structure the cost base ensuring that margin recovery is not entirely dependant upon market improvement. Prudently and we believe reasonably, we are removing all forward forecasts until visibility on revenue recovery and productivity rates into H2/20 become clearer. However, TClarke's operational strengths, financial robustness and cash coverage of dividend in the most testing of circumstances gives us renewed confidence to uphold a Buy recommendation.
We know that the contracting end of the industry has continued to site operate in a very piecemeal fashion throughout this pandemic, with limited official guidance beyond acceptable safe working practises. As more and more sites become accessible the main contractors' return to work will be largely self-determined and appear to the outside world as somewhat seamless. The greatest challenge facing the contractors in my view is the inefficiency of working in this new environment and supply chain reliability.
Companies: BREE BRCK CTO
TClarke has delivered on cue in 2019 highlighted by a robust £400m order book, attainment of target 3% operating margins, (tax-aided) EPS growth of 22%, dividend up 10% and maintained net cash of £12.4m. To date there is no identifiable impact on trading from COVID-19 but inevitably there will be. Acknowledging this, we maintain our 2020 and 2021 forecasts, simply because the AGM in May would seem a more appropriate and considered time to re-assess on the basis of known events. Today however, we believe TClarke is in a far stronger position both operationally and financially to face the immediate challenges, the latter referencing cash balances, liquidity and available facilities. Medium-term we see a resumption of growth from sustained margins on a rising top-line driven by demand for data-centres, regional up-scaling of contract values and potential European penetration. A prospective 2021E PE of c4x, EV/EBITDA (ex-pension deficit) of 2x and yield over 6% is worth keeping in mind for when markets eventually stabilise.
One might describe today's announcements as ‘hit and hope'. Confirmation of the 2019 trading results is a definite ‘hit', achieving target margins of 3%, EPS growth of 13.5%, better than expected cash balances and a rising order book through Q4. The ‘hope' element is in its 5-year UK exclusive deal with Gooee, which has the potential to be financially rewarding but more so enhances TClarke's technology/value-add offer in smart buildings that in turn underpins core electrical and M&E services revenues. Given that sustainability of margins is now the watchword, anything that bolsters TClarke's revenue growth prospects must be regarded as a positive by investors. The stock remains particularly attractive on rating grounds; estimated 2021 EV/EBITDA of 3.3x, PE sub-7x, yielding 3.9% with a robust balance sheet and cash flows. BUY.
We effectively re-initiate TClarke on a buy rating against a ‘model fair value' of 136p (20% upside). A positive trading update confirms 2019 consensus and the achievement of target 3% margins. The next leg of growth will focus on revenue expansion (and margin sustainability) which potentially drives high-single digit earnings growth beyond 2021. This is scarcely recognised by a 2021e PE of c6x, dividend yield of 4.4% and FCF yield rising through 9%. The stock has clear attractions on valuation and income grounds.
H1 was another positive trading period for TClarke, with PBT increasing by 24% to £4.6m. The Group continues to make solid progress against its 3.0% operating margin target, achieving a margin of 2.9% in H1 (H1’18: 2.6%). The order book has been maintained at £370m and provides strong support for our full year forecast, which is now 96% covered. Our FY20 forecast is also 50% covered by the order book. This is a strong position against a backdrop of political uncertainty and we maintain our forecasts. The strategy is delivering and TClarke is well on its way to achieving its full year targets. With sustained earnings momentum, we believe the shares will continue to outperform the wider peer group and we reiterate our 150p intrinsic value.
Due to a change in Analyst role, Cenkos Securities plc has suspended coverage of the following stocks (see table 1). Our previous recommendation and forecasts can no longer be relied upon.
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TClarke’s update confirms that trading in the year to date has continued to be in line with expectations, having upgraded forecasts as recently as March. The statement reiterates management’s 3% sustainable operating margin target for FY19 and beyond. The order book at £403m (May 2018: £368m, Feb. ’19: £430m) continues to support a strong outlook for the Group and, notwithstanding Brexit uncertainties, TClarke is seeing no lack of opportunities across its end markets. A new venture in Europe is an exciting development and could present upside to forecasts in future periods. We expect strong earnings momentum and revenue visibility to continue to drive the share price and we continue to believe that a premium rating is justified, reiterating our 150p intrinsic value.
TClarke cumulatively outperformed our original FY18 EPS forecast by 32% and by 2% on our latest forecast. The order book is at another record high of £430m at February 2019, supporting a strong outlook for the Group as it continues to outperform the wider construction market. We have upgraded our FY19 PBT forecast by 8% and introduce an FY20 forecast which implies PBT growth of 6%. We believe strong earnings momentum and revenue visibility should support a higher share price and believe a premium rating is justified.
TClarke continues to deliver on its strategy, with strong momentum in earnings and the order book, whilst maintaining a healthy balance sheet (the Group carries no debt). Both revenue and operating profit are expected to be in line with expectations after the upgrades in November (EPS estimates increased 12%/15% in FY18/19). The order book hit another record high at £411m in December 2018. This is a 22% increase year on year and a 2% increase on the figure reported in November. The Technologies sector, a key growth area for the Group, has been the main driver of this increase. Our FY19 revenue forecast is now 88% covered by the order book. The outlook statement is confident and we believe that positive earnings momentum will continue to drive the share price. We also see the rating as undemanding, with the shares trading on a substantial discount to peers.
Specialist building services group TClarke has reported strong trading in FY18. Operating profit is expected to be 11% ahead of our previous forecast, driven by better than expected revenue and margin progression (approaching management’s 3% target). The outlook statement strikes a confident tone, supported by a record order book, which stood at £403m in November. We have increased our EPS forecasts by 12% and 15% in FY18 and FY19. Our FY19 revenue forecast is 70% covered by the order book, giving us confidence that earnings momentum will continue. We believe the shares are attractively valued, trading on an FY19 P/E rating of 5.3x, and believe a peer group rating is justified. We also note the attractions of a >4% dividend yield
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Interim results represent another period of strong delivery against expectations. Management has reaffirmed its 3% margin target and the Group made significant progress towards this in H1, achieving a margin of 2.6% vs. 2.0% in the prior year. Adj. EBITA increased by 37.9% to £4.0m. A strong order book underpins earnings visibility, with our FY18 revenue forecast now fully covered and FY19 50% covered. In our view, TClarke is a well managed business with a focus on quality that is not reflected in the current rating (6.4x P/E, 5.4x EV/EBITDA, 4.4% yield). We see intrinsic value at 104p (25% upside), based on a blended average of peer group multiples.
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Full-year results were at a record level and slightly ahead of expectations by £0.2m at the adjusted PBT level, or 2.8% better at the EPS level. Cash generation was also stronger than expected, resulting in net cash of £3.2m. The dividend was maintained – a sign of confidence. Good strategic progress was made, helped by the integration synergies of Pacer and new product development programmes. Our forecast and price target remain under review given COVID-19-related uncertainties.
Companies: Solid State
The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Companies: Avon Rubber
Brick and concrete products manufacturer Forterra has raised c. £55m gross in an equity placing in order to maintain its strong balance sheet and support the Group's continued investment programme. It was accompanied by, in our view, a reassuring trading statement which we believe is backed by yesterday’s brick industry data and comments from housebuilders, which suggest that demand has been recovering from its lockdown lows, before the PM’s promises to “build, build, build” housing and infrastructure.
Successful K3 Capital placing to raise £30.45m (gross) at 150p to fund the £9.3m acquisition of Randd UK Ltd, an R&D tax credit specialist with an LTM EBITDA of c.£2.0m, with a margin of c.50% and revenues typically contracted for 5 tax years with many recurring thereafter, followed by future potential deals in SME exposed markets. K3 has established itself as an innovative company that is able to effectively gather, generate and mine large quantities of data in order to scale up M&A services to SMEs. Transferring these lead generation capabilities to adjacent SME markets can allow rapid growth from proven models, at scale.
Companies: K3 Capital Group
Blackbird plc* (BIRD.L, 19.25p/£64.7m) | Mirada plc* (MIRA.L, 92.5p/£8.2m) | Tern plc* (TERN.L, 10.75p/£29.0m) | Checkit plc (CKT.L, 39.5p/£24.5m)
Companies: BIRD MIRA MIRA TERN CKT
Further Profitable Growth to Come
discoverIE reported FY20 results ahead of our forecasts for underlying operating profit and EPS. Looking through short-term COVID-19-related disruption, the company has set new strategic targets for the next five years. These are a continuation of the strategy to grow the Design & Manufacturing business organically and via acquisition and include the target to increase the group operating margin from 8.5% (pro forma) to 12.5%. We maintain our normalised operating profit and EPS forecasts.
Companies: Discoverie Group
Smart Metering Systems (SMS) has announced that it has emerged from the recent Covid-19 uncertainty in a strong financial position and taken the decision to return funds received from the Government under the Coronavirus Jobs Retention Scheme. Current net cash of £48m (not including furlough grant) is ahead of previous expectations and underlying profitability for the year to 31 December 2020 is expected to be in line with expectations prior to lockdown, despite the obvious interruptions to meter installation activity that it has caused. During lockdown essential emergency field engineering work continued and SMS completed the sale of a proportion of its meter asset portfolio for a gross cash consideration of £291m (£282m net). In March 2020, SMS announced that it would rebase its dividend to 25p (prospective yield 4.3%), index linked to FY24 and commencing payments in October 2020, quarterly thereafter. A phased resumption to meter installation activity commenced on 1 June 2020.
Companies: Smart Metering Systems
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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Marlowe has raised £40m in new equity to finance the acquisition of Elogbooks (£7.3m cash upfront and up to £6.8m contingent deferred) and accelerate consolidation of their markets. We update our forecasts to reflect this transaction and COVID-19 trading conditions (FY21E Adj EBITDA unchanged at £24m).
Updating forecasts following 2019 results
Companies: Trackwise Designs
Full year results ahead - robust position against uncertain near-term backdrop
Solid State is a manufacturer of computing, power and communications products, and value added distributor of electronic components. This morning, the group has released full year results with PBT and EPS slightly better than our upwardly revised forecasts had assumed and reflecting a strong margin performance in the year. As previously flagged, cash generation was particularly strong. The group entered FY 2021E with a strong order book, which is reported to have stood at £37.9m as at 31 May 2020, an increase of some 5.6% from a year earlier. With little in the way of cancellations or deferrals of orders, Q1 2021E revenue has held up well, whilst order intake has been just under 15% lower than the prior year, which suggests a weaker revenue performance in Q2/Q3 but with the tender pipeline implying a potentially stronger Q4. Reflecting the present uncertainty, we leave our forecasts under review for the time being. Fundamentally, and backed by a strong balance sheet, we believe that Solid remains well positioned to come through the current crisis and will emerge as one of the winners when normal service resumes.
The Smart Zones customer base is expected to reopen, to a large extent, this weekend. The reopening of pubs will bring forward a revised billing profile and markedly improve the Smart Zones revenue base. Smart Machines continues to operate profitably and the group's Business Interruption Loan should buttress the balance sheet through this year. While our forecasts remain withdrawn we can see an encouraging pathway to normalised trading next year.
Companies: Vianet Group
As flagged in the April trading update, Solid State’s FY20 results showed a 19.7% growth in revenues and 34.3% jump in adjusted profit before tax. Demand from the medical and food retail sectors is strong but weakness in the oil & gas and commercial aviation sectors related to the coronavirus pandemic is likely to result in lower year-on-year sales during Q2 and early Q321. While management sees potential for a Q4 recovery, the current range of FY21 profit outcomes is wide, so it is not providing guidance.