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Thursday 22

March, 2018 5:54 AM


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Sun continues to shine on RCR Tomlinson

Sun continues to shine on RCR Tomlinson

By Tony Featherstone 03.10.2017

The adage that it is better to buy companies selling the picks and shovels during booms rather than those doing the digging holds true in many industries. The suppliers of booms are often where the real money is made, with less risk than speculative firms.

Consider agriculture. Promoters have long predicted a “dining boom” as food demand from Asia soars. Some Australian agriculture stocks have delivered stellar returns: Treasury Wine Estates in viticulture is an example. But many more have disappointed over the years.

I prefer the “picks and shovels” approach to agriculture: Incitec Pivot (fertilisers), Nufarm (crop-protection products) and property investment (Rural Funds Group). They have less risk than producers that face commodity, currency, weather and pest risks.

It’s a shame Australia does not have listed agriculture-technology companies, for that is the next boom as artificial intelligence, robotics and drones transform farming worldwide. Or infastruture companies that specialise in agriculture: trillions of dollars of supply-chain investment are needed in Asia alone to refrigerate food and get it to more people.

The same is true of renewable energy. Promoters for years have predicted a “green energy” boom and clean-technology stocks are outperforming after years of weak returns. 

Like agriculture, the best long-term bets in renewables are equipment and infastructure suppliers rather than emerging firms developing technology. For all their promise, too many micro-cap cleantech stocks on ASX have disappointed over the years. 

Australian investors must look overseas for large manufacturers of solar equipment. The United States is home to the world’s largest solar companies, such as First Solar Inc, SunPower Corporation and JA Solar, each listed on NASDAQ.

Denmark’s Vesta Wind Systems, Germany’s Nordex and Spanish company Gamesa stand out in wind-power.  US-based Covanta Energy is an option in waste-to-energy power generation. 

Some Australian companies are well placed to benefit from rising demand for renewables. Engineering and infrastructure services provider RCR Tomlinson has a record order book, largely because of rising demand for renewable-energy products in solar. 

I identified RCR for The Bull in January 2017 when it traded at $2.85, describing it as “one of the better ways to play the services side of cleantech and infrastructure projects over the next five years.” The stock is now at $4.39 and likely to head higher over the next 12 months. 

Chart 1: RCR Tomlinson
Source: The Bull 

My positive view on RCR remains, despite its higher valuation. Gains will be slower from here, but there’s a lot to like about the company’s strategy and management execution.

RCR announced a record order book of $1.4 billion plus preferred contractor status of $1.6 billion in its FY17 result, released in August. The $3 billion potential work pipeline (order book and preferred status) compares to $790 million in FY14. RCR is flying.

The company secured $700 million in contract wins in a few months leading up to FY17, mostly for solar farms. That momentum should continue as demand for solar projects rises in the next five years and as RCR strengthens its position as a leading supplier of large-scale solar projects. 

Renewable energy is forecast to be the fastest-growing energy sector and within that solar is expanding rapidly and has a strong pipeline of projects. RCR’s exposure to solar farms should be a strong tailwind for earnings over the next five years. 

RCR is, of course, broader than renewables. The business is better known for its work in resources, traditional energy and infrastructure. Infrastructure (which includes the renewables projects, in addition to rail transport) constitutes about 62 per cent of revenue. 

RCR’s rail, tunnel and resource projects should also benefit from a growing order book. An upsurge in State Government transport projects is a good backdrop for RCR and other transport infrastructure providers. 

Valuation is the key issue with RCR. After strong gains, the stock trades on a forecast FY18 Price Earnings (PE) multiple of about 15 times, on Macquarie forecasts. That is less than its peer companies (they trade closer to 19 times) and arguably undemanding for a company that is leveraged to a long-term growth trend in solar farms.

An average price target of $4.41 for RCR, based on the consensus of four broking firms (too small to rely on) suggests the company is fully valued at the current price.

RCR can do better than the market expects, but a period of share-price consolidation or a pullback in the lead-up to the Annual General Meeting in October or interim result in February 2018 would not surprise. 

In the medium term, the market will see RCR more clearly as a play on solar-farm construction and pay a higher valuation as solar accounts for more than a third of revenue in FY18.

As a small-cap stock, RCR suits experienced investors comfortable with higher risk.

• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at September 27, 2017.


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