The Engineering Firm Benefiting from the Resurgent Resources Sector

What happened to RCR Tomlinson shares?

It was only a year ago that shares in RCR Tomlinson [ASX:RCR] were headed for the basement. As an engineering business that designs, fabricates, installs and repairs equipment for the mining and energy sectors, investors could find little reason to support this small-cap company.

However, those that foresaw the turnaround in these sectors will now be patting themselves on the back. Shares in RCR have almost trebled since February last year.

Why have RCR shares risen?

Engineering services businesses generate the bulk of their work from the much larger resource and energy companies. After the mining bust and the collapse of the oil price, these producers had precious little left over to invest in new or additional capacity.

But strengthening commodity prices over the last 12 months has seen these companies re-open their wallets. In its recent half-year results, RCR was able to announce a 20% increase in revenue, with EBIT (earnings before interest and tax) jumping a whopping 74%.

What now for RCR Tomlinson?

While the bounce in commodity prices helped lift its profit, RCR is looking for new ways to diversify its revenue base. It has new rail and tunnel projects on the go, and is expanding its base in the renewable sector, with emphasis on large scale solar power projects.

With a gearing ratio of just 17.6%, and double the amount of cash on hand from last year, RCR looks well placed for the future, with a total order book exceeding $1.8 billion. But after such a strong run up in price, investors might want to wait for a pullback before looking to get on board.

By Matt Hibbard

Money Morning Australia