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Why the RCR Tomlinson share price is sinking today

Down chart

RCR Tomlinson Limited (ASX: RCR) has seen its share price slammed down 9% today to $1.255 after the mining services provider announced it was exiting the coal services business.

By contrast, the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) is up 0.6% in late afternoon trading.

The company announced today that it will close 14 local and 2 international unprofitable businesses as part of a reorganisation, which will result in a hit to revenues and earnings.

RCR says it will reduce its exposure to coal mining services as a result of low profitability in the sector over the past 5 years and low capital investment. The company says the unsustainable pressure on service providers to reduce pricing is unsustainable and plans to close 12 unprofitable businesses exposed to coal mining.

The company will also reduce its fixed overheads by cutting its headcount and discontinue a number of fabrication facilities.

Instead, the company says it will focus on its existing iron ore, gold, base metals and mineral sands markets, and look to increase its exposure to renewable energy and transport.

To close all these operations down means a number of hits to the company’s financials both one-off and ongoing. Redundancies and branch closures will result in costs of around $35 million, of which around $10 million is non-cash. Closing those operations will also mean $100 million less revenue each year.

Another 100 redundancies will cost the company $7 million, and other one-off- items will be around $2 million.

In total, RCR Tomlinson will take a hit of around $44 million in costs and lose $100 million in annual revenue.

The company says it still expects underlying net profit for the 2016 financial year to be around $22.2 million – the average consensus expected by five analysts covering the company.

At the current share price of $1.27, that’s a P/E ratio of 7.8x, suggesting the market thinks worse may be to come.

Foolish takeaway

With the pressure exerted by falling commodity prices flowing through to contractors and mining services companies, it was only a matter of time before even some of the best companies in the sector felt the heat. Monadelphous Group Limited (ASX: MND) faces similar issues as we wrote late last year, and it’s regarded as one of the best mining services contractors in Australia.

They are all now looking to expand into different industries – and face varies degrees of success (and failure).

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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.

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