Ambition = risk at T Clarke

Let’s jettison all the baggage.

I like T Clarke (CTO). It’s made me money in the past. It’s got a long and illustrious history, and a old fashioned work ethic that promises never to let you down. But it’s losing the Thrifty 30 money, having returned –31% since I added it in October 2009.

None of those things matter.

Now that T Clarke’s published its 2010 annual report, I have to consider its position in the portfolio, and much more important than price movements and nostalgia are the numbers and what kind of business it is now.

The company has morphed from being a regional electrical engineer to a nationwide building services group. Electrical engineers wire buildings, building services companies seem to do everything except lay the bricks, and we don’t yet know how good T Clarke is at everything. The rationale for the change is customers want it, and if T Clarke is to remain a market leader it must transplant the reputation it has as an electrical engineer to plumbing, mechanical engineering, maintenance, IT infrastructure and the rest of it.

But restructuring is costly and the £17m T Clarke spent on acquiring facilities management company D&S and mechanical engineer DGR in 2010 means shareholders’ equity  is no longer backed by any tangible assets (orange bars). It’s been replaced by goodwill, the price T Clarke paid for the businesses reshaping it over the value of their physical assets. The goodwill may or may not be worth the amounts recorded on the balance sheet, depending on how well T Clarke implements its vision.

It’s making these changes in the middle of a construction industry recession and judging by its F_Score of three out of nine, just about the only positive from last year’s trading is that T Clarke is still profitable. OK, it hasn’t taken on any long-term debt yet either. Profit margins are down, current assets barely cover current liabilities now, and the company is losing money on a cash basis (light green line) as it gives more generous credit terms to its customers and accepts more onerous ones from its suppliers. Last year was the same, and so to conserve cash, T Clarke has cut the dividend by 35%.

I’m cross with myself about T Clarke. I don’t think I recognised the scale of its ambition as it expanded both the range of its activities and the area in which it operated. Instead, I saw the T Clarke I wanted to see, the old one, only slightly bigger and slightly more complicated. That kind of T Clarke may not have a place in the modern construction business, but it remains to be seen what kind of place the new T Clarke secures.

It’s hoping to grab itself a big piece of the market when recovery comes by expanding the scale of its operations and sales now, but since we don’t know when recovery will come, and Clarke’s current trading, and balance sheet look quite weak to me, that seems like an all-in gamble.

The fact is, I wouldn’t even consider adding a company to the portfolio where shareholders’ equity only accounted for one third of total assets and its F_Score was less than three (its a red light in my traffic light system – see table to the left). I could only consider holding it if I thought it probable the company would recover sooner rather than later.

But T Clarke isn’t implementing a tried and tested blueprint. It’s trying something new, so it’s too risky for the Thrifty 30 and it’s with regret that I say goodbye.

Second time-round T Clarke hasn’t been so good to me, but that’s my fault. Maybe I’ll catch it on the up next year, or the year after, and be third time lucky.