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RCR Tomlinson collapse gives lessons for retail investors

Last year, RCR Tomlinson was a billion-dollar company. Last week, it went into administration.

RCR went bust with a market capitalisation of $231 million. Two hundred and thirty-one million dollars one day, zero the next. Staggering. A lot of listed stocks have gone bust over the years, 20 Australian stocks in the past year. Well-known ones include Oroton and Quintis. Other memorable disappearances include Sons of Gwalia, OneTel, Mirabela Nickel, Babcock & Brown. All went bust with significant market capitalisations and that money evaporated in a day.

Market darling disappears in a year

A year ago, RCR’s share price was 457¢, at which point it was a sharemarket darling, up 300% from the price of 114¢ 18 months earlier. Bust a year later.

RCR employed 3,400 people and had been in business since 1898. It was involved in infrastructure projects including power stations, water-treatment systems and rail infrastructure as well as maintenance of those projects. Safe, long-duration projects. It was perceived as a growth stock, a contractor to one of the most resilient drivers in the Australian sharemarket, government spending on infrastructure. It was an 'infrastructure play'.

But it has all gone wrong. It has been forced to pay liquidated damages to clients after delays on nine solar farms left it unable to pay staff and continue operating. The criticism is it had been undercutting its competitors in the tenders on these projects to the point of irresponsibility.

Even more confounding than this, from a sharemarket point of view, is the company had a capital raising at 100¢ in late August 2018 and raised $100 million. The stock at the time was trading at 280¢. All that money, $100 million, has seemingly disappeared three months later. At the time of the capital raising it did admit to a profit guidance downgrade but explained it by saying that broker forecasts “do not reflect the adoption of the new accounting standard for revenue recognition (AASB 15) which came into effect for RCR on 1 July 2018”.

What chance a retail investor?

But this is not a blame piece, this is to make the point that if some of the most prestigious fund managers in Australia can dump tens of millions of dollars into a company three months before it goes bust, what chance has the lowly private investor doing amateur analysis from the comfort of their lounge chair or kitchen bench? Some of these fund managers are extremely well resourced. They employ analysts and pay them $200,000-plus to assess the risks of companies. Even they, clearly, had no idea of the impending collapse.

Allan Gray, for instance, a highly reputable fund manager with a good performance record, put $20 million into the stock in October, according to Thomson Reuters. RCR has burnt that money in less than a month. Perpetual, the biggest shareholder, put $22 million into the stock in September. Pendal, the second-largest shareholder, put $11 million into the stock in September. That money has gone. And they were not the only ones. RCR had 2831 shareholders.

One of two things must have happened. Either the analysts were incompetent, which is highly unlikely, or the information provided by the company was incomplete. Either way, it is a wake-up call for all of us playing the equity markets, a reminder that analysis is hard and that despite strict continuous disclosure requirements, there are big gaps in the information on which the analysis is based.

The broker analysts were no help either. We all know stockbrokers are conflicted when writing about their corporate clients, but they have been actively wrong in their research about RCR. I have always felt that much broker research follows the share price rather than leads, and this is a prime example. Prior to the capital raising and profit warning, Ord Minnett had a buy recommendation and a 519¢ target price. Citi had a target price of 350¢. Macquarie had an outperform recommendation and a 445¢ target price. Macquarie, by the way, underwrote the $100 million capital raising in August.

Let it be known that brokers are rarely writing research to help individual investors make money. They are writing research to help themselves make money. The core purpose of the equity market is to raise capital, not to help investors. Research reader beware.

Oh, and the New Zealand government isn’t much better either. They awarded RCR the Auckland City Rail Project on October 11. At the time, RCR said: “RCR is very pleased to be recognised for our exceptional rail systems capability and to be selected for this portion of such a landmark project for Auckland.” The City Rail Link, Auckland said, “shows the calibre of talent wanting to be part of delivering this important project that will transform the way people move and live in Auckland”. It is a NZ$3.4 billion project. It didn’t know, either.

Make sure you diversify

The conclusion is you have to accept there is a large element of the unknown in the equity market, research is based on assumptions which can be wrong, information is unavoidably incomplete, brokers are there to make money out of share issues, not to write research for individual investors – and, boringly, you need to invest in more than one stock!

Oh, and that class action against the company? Noble stuff, but there is unlikely to be anything left for investors after the customers, banks and employees are paid out.

 

Marcus Padley is the author of the daily stock market newsletter Marcus Today. See marcustoday.com.au. This article is republished with permission.

9 Comments
Tom
December 09, 2018

I just went through the last 15 RCR annual reports and found the Current Ratio (Acid Test..) averaged 1.2 (fairly safe) prior to 2016, but changed to an average of 1.0 (red flag) when RCR got involved in Solar EPCs. Clearly, the company had liquidity issues for two years prior to collapse. The Board must have known it. Analysts, bankers and investors should have spotted it. Does anyone bother to look at fundamental financial ratios these days? If the retail investor does his homework, he has a good chance of avoiding duds.

AlanB
December 05, 2018

Marcus Padley asks a really pertinent question. What chance a retail investor? As a home based retail investor I ask myself that question and some others.
Did the experts, the brokers, the financial advisors, the analysts, fund managers, corporate regulators, financial journalists predict this debacle with RCR Tomlinson or miss key indicators of impending collapse?
There really needs to be a post-mortem done on this because investors and clients need to trust the stock advice of experts.
All those who recommended participation in the recent RCR capital raising should be named and shamed.
Ord Minnett, Citi and Macquarie with their buy recommendations and high target price should hang their heads in shame. Morningstar too.
RCR had its AGM on 30 Oct 2018 and I see nothing in the presentation or chairman's address indicating imminent doom. Do major share sales by RCR executives in 2017 raise red flags?
How do we avoid buying into the next RCR? Yes, diversification is a strategy but no better than what grandmother said about not puting all your eggs in one basket. Diversification will only reduce risk, not avoid duds.

Warren Bird
December 04, 2018

This is another lesson in the importance of diversification.

S..t happens in markets. So you want to make sure that it just smudges your shoes, not ruins your suit.

The way you do that is to have a diversified portfolio.

As the managers named did. For example, Allan Gray. Yes, they lost money holding this stock. But it's just one of the stocks they invest in and their funds have outperformed over the last year by 4% above the market.

Stock research and selection is only one part of successfully managing money. Portfolio construction is also vital. I think that's actually the lesson in this for retail investors. Accept that even with great research things can go wrong, but put a portfolio together in such a way that those events don't blow up your overall outcomes.

I've been preaching that message about bonds for years, but it also applies in equities. You don't need as many stocks in a well diversified equity portfolio as you do in bonds because shares have loads of possible upside to offset the ones that let you down. However, you do still need to hold a portfolio put together enough stocks across different industries, etc so that you don't blow up.

Les
December 03, 2018

I enjoyed the article and certainly there is always a large element of unknown in the share market market and always will be.

But large corporate collapses rarely come out of nowhere and I am not sure investors and more importantly trustees need to just shrug their shoulders on this one.

The analysts are well paid, some are probably not as independent as they could be in many instances, but most are competent and actually nobody wants to see their clients to lose all their money - not even stockbrokers! It's bad for business!

Construction companies (and companies that engage in both construction and infrastructure love to call themselves infrastructure companies because it just sounds so much less risky) are inherently risky businesses that are difficult to run. Each project is unique, the margins are skinny.

But if they have a prudent risk management framework it should be almost impossible for one construction contract to bring the whole company undone, because cost variations are a known/unknown part of the business and it never makes good business sense to bet the bank on just one contract.

Sure if a construction contract turns south, the company might make a big loss, have a bad year, a bad two years and the share price tanks for a while.

But it stretches the limits of reality that a large company can raise $100m from investors, with presumably no going concern issues tabled by management, and 3 months later go broke.

In terms of practically what can be done is for others better qualified than me to determine.

But if trustees and large investors act more like it was their $1m retirement nest egg or house that was just lost it will change the whole corporate landscape for everyone including retail investors.

Because I am not sure how many of us would shrug our shoulders and take a nap or go out for a run at lunch if we had just lost $1m of our own money let alone the $100m that was mostly invested by someone, on someone's else's behalf, 3 months ago.

Albert Uo
December 01, 2018

and, boringly, you need to invest in more than one stock! suggest you try broad index ETF and sleep better

Michael
November 30, 2018

I was expecting Marcus might provide something insightful as to what might have gone wrong and what the exorbitantly remunerated analysts and fund managers might have missed.
Overbidding for work, reduced margins and contingencies, inflation and cost pressures (refer to cost inflation comments BHP and Rio have made in recent months), working capital pressures, etc, apart from the two solar projects identified that were severely loss making. The bank guarantees and insurance bonds to support their work will have been called upon (if the beneficiaries are smart).
We will no doubt need to wait for the Administrators and Liquidator’s Report in due course.

Shylock
November 30, 2018

Time to hold the directors personally responsible, sell their assets held in personal, wife or company name and send them to gaol.

Please no Alan Bond type "punishment" as he is miraculously back in the top 500 Rich List. How is that possible ??

Not holding my breath.

Ricky
November 29, 2018

Aren’t the directors especially the independent directors there to protect the shareholders?

Alex
November 29, 2018

Indeed, the fund managers who visit the company, pour over the balance sheet, kick the tyres and consider every possible outcome in hours of discussion and study did not see this coming. What hope retail investors who hear a tip on the TV rush out and buy.

 

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