Small Caps | Aug 31 2011
– Solid full year earnings result from Tox Free received nod of approval from stockbrokers
– Further growth expected from additional contract wins
– Growth outlook implies value at current levels
– Stockbrokers broadly positive with ratings
By Chris Shaw
Industrial and hazardous waste management group Tox Free Solutions ((TOX)) delivered what most in the market viewed as a good FY11 profit result, lifting revenue by 45% to $143.6 million and net profit after tax by 68% to $13.3 million.
Earnings growth was driven by stronger than expected margins, observes DJ Carmichael, helped by both improved operational performance and flood remediation work in Queensland. Further margins gains are seen as likely given the recently acquired Waste Solutions division will contribute through FY12.
Revenue gains reflected three new waste management contracts in the period, while DJ Carmichael also noted operating cash flows during FY11 were strong thanks to an improvement in debtor collections. The strength in cash flows meant net debt to equity fell to just 11%.
For FY12 DJ Carmichael is forecasting earnings per share (EPS) growth of 25% given a forecast of 17.2c for the year, rising to 18.8c in FY13. These forecasts compare to consensus EPS estimates according to the FNArena database of 18.4c and 19.9c respectively. Among those in the database, JP Morgan expects EPS growth of 20% in FY12.
While DJ Carmichael's numbers are below consensus in EPS terms, the broker sees earnings risk as to the upside given a contract tender pipeline of $100 million. A good track record with blue chip clients adds to confidence additional contracts will be won, as does significant investment in systems and people in recent years.
This investment via capex is likely to remain elevated, as while capex in FY11 came in at $19.4 million management has guided to $25 million for FY12. This is above DJ Carmichael's forecast of $15.7 million, something seen as reflecting management's confidence in being awarded new contracts.
Following changes to numbers post the FY11 result, DJ Carmichael has moved to an Accumulate rating on Tox Free. The call suggests some value at current levels, as the broker's numbers imply a FY12 earnings multiple of 12.2 times. This is low relative to historical multiples for Tox Free.
DJ Carmichael's Accumulate call is conservative relative to the market, as of the three brokers in the FNArena database to cover Tox Free two have Buy ratings and one, JP Morgan, has a Neutral recommendation.
RBS Australia's Buy similarly reflects value given recent share price weakness, while UBS remains positive on the earnings outlook for Tox Free and so expects the share price will improve. JP Morgan's counter is while earnings growth is expected, this is largely priced into Tox Free at current levels.
The consensus share price target according to the database is $2.48, which is above DJ Carmichael's valuation for Tox Free of $2.14 per share. This has come down from $2.59 given lower market multiples, the higher than expected near-term capex outlook and a forecast increase in corporate costs.
Shares in Tox Free have traded in a range over the past year of $1.70 to $2.52. The current share price implies upside of a little under 10% relative to the consensus price target in the FNArena database.
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