More upside for RCR Tomlinson

RCR Tomlinson’s (ASX:RCR) first half profit recently beat market expectations. The shares have jumped higher on the news but is there further upside from here?

We had an in-depth look at RCR Tomlinson back in January when it was at cheaper levels, and we liked what we saw. (If you are not receiving our client research every Tuesday, click here to obtain a free 8-week trial).

About the Company

RCR Tomlinson is a diversified engineering and infrastructure company, intelligent engineering solutions across three sectors: Infrastructure, Energy and Resources sectors.

RCR Tomlinson’s core capabilities encompass; development, engineering, procurement, construction (EPC), operation and maintenance of major infrastructure and resource projects. These include power generation plants (using a wide range of fuels; solar, wind, battery and hydro), water and waste treatment systems, rail and road tunnel infrastructure, rail signalling and overhead wiring systems, mineral processing and material handling plants, integrated oil & gas services (both onshore and offshore), supply of RCR Tomlinson proprietary materials handling and process equipment, and property services including facilities management, HVAC and electrical services.

Over the last four years, the Company has grown its order book, as well as the amount of work for which the Company has preferred status. While the Company’s recent interim result were ahead of market expectations, the key takeaway from the result was that RCR Tomlinson increased its pipeline of rail work (within the Infrastructure division) from $1.3 billion to $4.0 billion. The Company is also confident that it can win one or more of the potentially large contracts in the near term. In particular, the contracts RCR Tomlinson are currently bidding for include a ~$1b Transport NSW 50/50 JV with a major contractor due before 30 June 2018 and Auckland city rail link (~$500m) where RCR Tomlinson is down to final two providers.

Aside from rail, renewable energy is a significant market opportunity for RCR Tomlinson. The Company is currently the market leader in the EPC of large-scale solar projects. During FY17, RCR Tomlinson secured over 600MWac of renewable energy projects and is targeting an overall market of 12.7GWac over the next few years. At present, there are over 1GWac of solar projects in development or under an early contractor involvement process, where RCR Tomlinson is the preferred contractor. The Company is winning and delivering solar projects at attractive margins and RCR Tomlinson is confident of winning more projects.

The Challenges for RCR Tomlinson

Notwithstanding, there are challenging parts of the business portfolio. In particular is the Resources segment, which delivered a loss in the recent interim result. This was due to the fact that the segment incurred additional costs in relation to changes to the scope of work initiated by the client. The positive news is that these contracts ended in the first half, with the segment expected to return to profitability in the second half.

Overall, the Company has guided to a stronger outlook, with continued solar and rail contract wins will continue to drive revenues higher. With the shares currently trading on a 1-year forward P/E multiple of ~14x, and attractively priced in comparison to consensus EPS estimates of +30% for both FY18 and FY19, RCR Tomlinson is well worth considering as an investment.

The chart for RCR Tomlinson

In our client research on 23 January (access a free trial here), we alerted our readers to the fact that the pullback from September was fairly corrective. This meant that the stock looked like a buy as it was poised to resume the uptrend. The recent results have seen it jump higher on stronger volume (circled), which confirms our charting analysis. RCR Tomlinson should go on to a new high from here so even current levels represent a buying opportunity.

RCR Tomlinson
RCR Tomlinson daily chart


Current share prices available here.

You can learn more about technical analysis in this article.


Michael Gable is managing director of Fairmont Equities.

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