Shares of diversified engineering and infrastructure company RCR Tomlinson Limited (ASX: RCR) have today dropped sharply following the release of its FY16 half year results.
At one point the shares lost more than 25% of their value, before recovering slightly and are now trading at $1.27.
Unfortunately for RCR Tomlinson shareholders, its earnings report came in well below expectations and highlighted the ongoing difficult conditions faced by the company. The shares have now lost more than 51% of their value since hitting their 52-week high reached only in November.
The main highlights from the result included:
- Revenue dropped 12% from the prior corresponding period (pcp) to $515 million
- Order book increased by 15% to $821 million
- Earnings before Interest and Tax (EBIT) fell 50% from the pcp to $14.3 million
- EBIT margin dropped 43% from the pcp to 2.8%
- Statutory net profit after tax (NPAT) decreased by 53% to $8.9 million
- Earnings per share (EPS) decreased by 54% from the pcp to 6.4 cents
- Interim dividend decreased by 50% from the pcp to 1.75 cents per share
- Gearing ratio currently at 9.2%
Investors looking at the financial highlights will notice there are not many positives for shareholders to take out of the result. Although revenues remained fairly robust, margins came under significant pressure and this severely impacted the bottom line. Furthermore, an EBIT margin of 2.8% does not leave a lot of room for error and investors should be concerned about this figure moving forward.
This result clearly highlights the pressures many energy and mining service providers are currently facing in a difficult operating environment. Those companies looking to fill there order books are being forced to take on low margin contracts as miners and drillers look to cut their capital expenditure while commodity prices are at cyclical lows. For example, its Energy division generated revenues of $89.2 million in the first half but only delivered $1.6 million in EBIT – a margin of 1.8%.
Importantly for shareholders, RCR Tomlinson remains conservatively geared and retains a strong balance sheet with net debt of just $32 million. The company still has $258 million of funding capacity to take advantage of growth opportunities if they present, although they seem limited in the current environment.
Interestingly, the board has decided to declare an interim dividend (although at a much lower level than the pcp) and this should provide some confidence to shareholders that the board believes they will be able to successfully navigate through these difficult conditions.
Conditions are expected to remain challenging for the remainder of FY16 and understandably the company is not forecasting for any growth in the half.
Instead, the managing director believes growth should return in FY17 as they look to take advantage of a number of strategic opportunities. RCR Tomlinson will also be looking to diversify its operations away from oil and resources and shift towards water, rail and power.
RCR Tomlinson is one of the best managed and operated providers of infrastructure and resources services listed on the ASX, but the outlook for the entire sector remains challenging.
RCR Tomlinson is not at risk of going under anytime soon, but earnings are likely to struggle for an extended period of time and, as a result, investors may find more attractive investment opportunities elsewhere.
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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.