Tox Free Scoops Up Wanless

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-Acquires Wanless businesses
-Provides more diversity to Tox Free
-Brokers cautious about commercial sector
 

By Eva Brocklehurst

Tox Free Solutions ((TOX)), a provider of industrial and hazardous waste solutions, has made an acquisition in the industrial and commercial waste collection segment which brokers expect will be viewed positively by the market. There are three parts to the Wanless business and it operates in Queensland and Tasmania. The acquisition price, considered full, is $85 million and will be funded via a $43m institutional placement and new debt facilities.

The acquisition may not be cheap but it continues to diversify the company's business away from hazardous waste and resources markets, and that's good in JP Morgan's opinion. The broker finds the acquisition will complete the company's footprint in Queensland, providing a presence in Far North Queensland which it did not have before, and also a number of solid waste depots in South East Queensland, which service the more traditional manufacturing and commercial sectors.

The company has delivered solid financial results with strong returns to shareholders, UBS notes. The broker finds it commendable that management has made an earnings accretive acquisition at a time when major competitors do not have the balance sheets to do so.On the plus side, Macquarie notes acquisitions the company has successfully bedded down include Waste Solutions NT, Pilbara Waste and MMS in 2011 and DoloMatrix in 2012. These four had annualised earnings of $17m at the time of acquisition. For Tox Free, FY13 is also to produce benefits from the start up of new contracts with Origin Energy ((ORG)), Asia Pacific LNG and Fortescue Metals ((FMG)). Tox Free also provides industrial maintenance services through subsidiaries Tox Free Industrial Solutions, Barry Bros Specialised Services and Grime Fighters.

The three parts of Wanless comprise Wanless Enviro Services, Smart Skip and Jones Enviro Services. Wanless Enviro had pro-forma FY13 revenue of $42m and provides solid waste services in Queensland, operating branches across the state. Smart Skip, pro forma FY13 revenue of $8m, is involved in the waste from construction and demolition in South East Queensland. Jones Enviro, pro forma FY13 revenue $12m, is an industrial and commercial waste recovery and recycling service in Tasmania.

One item that troubled JP Morgan was the large transaction cost involved, equating to around 7.5% of underlying acquired asset value. While the company removed these costs from the investor presentation in determining the accretion value of the acquisition, estimated at 8% on a pro-forma FY13 basis, JP Morgan argues it should be included as a cost borne by Tox Free shareholders in acquiring the asset. The acquisition price implies a FY13 enterprise value/earnings multiple of 5.8 times on JP Morgan's estimates, or 6.3 times when costs are included. 

UBS retains a Hold on the stock as the broker wishes to see more evidence of management executing in this new segment of the market. The broker is a bit concerned about the competitiveness of the commercial and industrial collection industry. JP Morgan agrees as it presents a very different market to Tox Free's base in hazardous materials and resources. The opportunities and market size of commercial and industrial waste are much greater but barriers to entry are lower.

JP Morgan also maintains a Hold rating. This takes the number of Holds to three on the FNArena database. CIMB has the third. The fourth broker covering the stock on the database is Macquarie, with a Buy rating. Macquarie believes the stock is fairly valued for the near term but is optimistic about medium-term options for growth, both organically and from acquisitions. The consensus target price is $3.43, signalling 1.2% upside to the last share price.
 

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