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Last year, RCR Tomlinson was a billion-dollar company. Last weekmonth, 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.
A year ago, RCR’s share price was $4.57, at which point it was a sharemarket darling, up 300% from the price of $1.14¢ 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 $2.80¢. 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”.
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 $5.19¢ target price. Citi had a target price of $3.50¢. Macquarie had an outperform recommendation and a $4.45¢ 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.
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.
Content first published in the financial newsletter cuffelinks.com.au on 28 N0vember 2018.