Market Commentary - Housing, Infrastructure, Construction and Services 27th January 2017
T Clarke has the stage to itself today with its trading update for the year ended December 2016. Optically T Clarke appears to be in good shape based on some key financial numbers. But as we suggest above the numbers need to be treated quite carefully as there are a considerable number of adjustments. The biggest riser in the HICS segment was up 1.7% and the largest loser was down 1.9%. By the way the companies concerned were Kier as the riser and SIG as the loser.
T Clarke has the stage to itself today with its trading update for the year ended December 2016. It is a pretty confused statement but one thing is clear, the order book is 10% higher at £330m than it was this time last year, according to the statement. But even that is a bit misleading for investors as it was £320m at the time of the interims. The read across to sector rivals in terms of market demand is positive and the indication that it has seen no cancellations is clearly good though, as realists, we might want to know if there have been delays.
Other items to note include, firstly, the company telling us that the board’s expectation is that its actual performance will exceed the markets expectations but its not clear what it refers to in terms of actual nor really which year! And at another point we are told that “profits” will be in line with market expectations after exceptionals. We think they mean that 2016 adjusted PBT when reported will be in line with expectations (at around £4.2m) and that 2017, even at this stage of the year, is likely to be reported at above the £5.1m the market is expecting for adjusted PBT.
Secondly, the company say that the underlying trading performance was “exceptionally” strong in 2H 2016 in part due to the timing of major project completion and stage payments received in the second half; it sounds like a bit of confusion needs to be cleared about the messaging and the difference between underlying and exceptional.
Thirdly, year end cash is at £9.2m, 39% higher than last year and well above the £1.3m at end June; the year end position is a tad misleading we suspect and the need for an increase in banking facilities by £2m to £15m suggests that average net debt might be a useful number for investors.
Finally, while the market might have expected £4.2m adjusted PBT for 2016 that was only after substantial exceptional charges for the fraud announced in November last year, now at £2.2m compared with £2.8m when first reported; we do not understand how recent adjusted profit for 2016 can be increased by a loss of cash from prior years. If that can happen some of it must have been in the P&L in prior years which remain unadjusted.
Optically T Clarke appears to be in good shape based on some key financial numbers. But as we suggest above the numbers need to be treated quite carefully as there are a considerable number of adjustments. The company fails to refer to its operating margin which was 1.9% in 2015 and 1.8% in the first half of 2016 versus 2.0% in 1H 2015. It looks as though the company had a strong second half last year, including an unusually high level of project completions. Our concern is that while CTO has improved since 2012 the business is not as stable as the headline numbers and statements would have us believe. It is unfortunate for CTO to have updated on day when there is little other news! We have kept an eye on its progress for many years and it is still on our list of companies for which investors need to have a good understanding of accounting to appreciate risk and reward.
Yesterday we saw very little movement in the sector and the UK equities market in total hardly moved at all. Whether there is just a touch of shock about the FTSE100 going through 7,000 and the Dow through 20,000 we do not know; generally there is exuberance, rational or otherwise.
The biggest riser in the HICS segment was up 1.7% and the largest loser was down 1.9%. By the way the companies concerned were Kier as the riser and SIG as the loser. Kier’s update was enough to convince the market that the risks on earnings expectations are up not down. There were a few brokers bold enough to raise earnings numbers for the current year by a small fraction. Hard work eh! And SIG gave up some recent gains for no specific reason of which we are aware. A few folks have been in touch regarding the warmth we have shown to SIG. Our marbles have not been lost, The key point is that SIG’s relationships with customers, suppliers and employees have been severely fractured in recent years BUT it has still made progress, kept its revenue art a high level and created good operating cash. The performance has been far from stellar. It is recoverable under good management, in our view.
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