Solar-Powered Growth

RCR Tomlinson is a construction, services and engineering services contractor operating in infrastructure, energy and resources markets in Australia, New Zealand and South East Asia.

 

The company has had five contract wins over the past month totalling more than $600 million, which we consider impressive in the context of FY17 revenues of $1.3bn. The awards include the following:

 

  • An energy contract with PT Kartanegara Energi Perkasa in Indonesia, worth more than $75m, to provide a combined cycle addition to its gas-fired power plant;
  • An energy, procurement and construction (EPC) contract and an operation and maintenance (O&M) contract with the Emerald Solar Farm in Queensland for $110m ($1.62/W), to supply power under a long-term power purchase agreement;
  • A ‘limited notice to proceed’ contract with the Haughton Solar Farm in Queensland for $170m ($1.70/W), ahead of finalising an EPC contract; and
  • Selection as preferred contractor for the Clermont and Wemen solar farms in Queensland for $260m ($1.60/W), to provide EPC and O&M services for both solar farms.

The prices of the contracts look reasonable to us when compared with RCR’s previous solar contract wins. However, we believe the company has had to invest significantly in its cost base ahead of these awards, meaning profit growth may lag revenue growth in first-half FY18.

 

We had already assumed significant contract wins, particularly in solar, but these awards have come faster than we expected and have driven a 7% increase in our FY18 earnings forecasts. Our FY19 estimates remain unchanged, as we assume more contract wins to replace the revenues pulled forward into FY18. However, significantly, 53% of our projected solar revenue growth forecast for FY19 has now been awarded or is at preferred bidder stage, suggesting the material growth we assume into FY19 is becoming derisked.

 

Clearly, RCR’s share price contains some expectation of future contract wins. However, we favour the stock as we believe it has a significant opportunity in solar, along with a strengthened balance sheet and an attractive valuation. There are also opportunities in rail and the recovering resources markets. We maintain our Buy recommendation on RCR and have raised our target price to $5.17 from $5.08.

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