Australia | Sep 22 2011
– Tox Free wins contract at APLNG project
– More contract wins expected in the region
– Earnings outlook strengthening but share price not reacting
– Brokers see value at current levels
By Chris Shaw
For some time both UBS and RBS Australia have had Buy ratings on waste management services group Tox Free Solutions ((TOX)) and news of a new contract signed by the company yesterday further supports their respective positive views.
Tox Free has announced a five-year contract for the provision of waste management services relating to construction activities at the Australia Pacific LNG plant on Curtis Island in Queensland. The contract begins immediately and UBS estimates revenues from the contract should total $20-$25 million.
The deal will underpin earnings expectations for Tox Free for FY12 according to RBS Australia, though forecasts are unchanged on the news as such contract wins have already been built into the broker's expectations.
The deal is strategically significant in RBS's view. This is because it positions Tox Free well for further contract wins in and around the Gladstone area as more LNG and resource projects in the region come on-line.
Potential contract wins won't be restricted to this area, RBS noting there are still around $75 million in contract tenders to be awarded around Australia. As well, Tox Free's recent acquisition in the Northern Territory strengthens the company's position relative to winning additional work from the Browse and Prelude developments.
A further plus for Tox Free according to RBS is management continues to focus on winning work in the mining and oil and gas sectors, where margins are stronger. This strength in margins should continue as management refuses to enter the more competitive metro municipal waste markets.
While RBS has made no changes to earnings estimates on news of the contract, UBS has lifted its numbers slightly through FY14. In earnings per share (EPS) terms UBS is now forecasting 18c for FY12 and 20c for FY13, while RRB expects outcomes of 18.3c and 18.9c respectively.
Price targets are unchanged at $2.65 for UBS and $2.44 for RBS. JP Morgan also covers Tox Free and rates the stock as Neutral with a target of $2.35.
What makes Tox Free a Buy for UBS is while so far this calendar year the share price is essentially unchanged, during the same period earnings per share estimates for FY12 have increased by around 16%.
Expectations of compounded EPS growth of 14% for FY11-FY14 suggests value, as UBS's numbers imply an earnings multiple for FY12 of 11.5 times and for FY13 of 10.5 times.
RBS agrees there is value in Tox Free at current levels, as its numbers suggest the stock is trading at a 14% discount to valuation at current levels. RBS argues a premium is justified, as Tox Free enjoys an oligopolistic position in some markets, has a solid balance sheet and delivers above average margins.
Further contract wins and the potential for acquisitions to boost earnings are other reasons why Tox Free could be re-rated which helps underpin RBS's Buy rating.
Shares in Tox Free today are slightly weaker and as at 10.35am the stock was down 2c at $2.13. This compares to a trading range over the past year of $1.70 to $2.52. The current share price implies upside of around 16% to the consensus price target according to the FNArena database of $2.48.
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