Tox Not Free Of Misapprehension
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Tox Free is now one of the largest industrial service and waste management businesses in Australia, with 57 operational sites across all states and the Northern Territory. The company employs more than 1000 people nationally, and operates a diverse range of industrial and waste services to all market sectors.
Like many companies that provide services to the resources industry, waste management and industrial services business Tox Free Solutions (TOX) has had a rough time on the sharemarket in the past year, as the slowdown in the mining boom – or the construction side of it – gathered pace.
Tox Free’s share price, at $3.26, is barely changed from a year ago. But in the shorter term – since May 14– the market has taken a dislike to TOX, stripping 13.3% from the price.
This week, we saw why, with the company warning that its second-half earnings would be slightly lower than that reported for the first half. Clearly, at close to 20 times earnings on what the market expected, Tox Free was judged to be in need of a slight haircut, and the price/earnings (PE) ratio has been stripped back to about 17-18 times.
But there are several salient points that should be kept in mind about Tox-Free. Firstly, actual mining construction operations account for about 1% of its revenue: the waste collection and services division – the bulk of its earnings – actually picks up business from the production stage, which is poised to pick up now all of the new projects come onstream, so the tail-off in mining construction will not have as much impact on TOX as many people obviously think.
Secondly, TOX has diversified its business quite well in the last couple of years: in particular, the May 2013 acquisition of Queensland and Tasmanian waste services business Wanless for $85 million brought it into the east coast waste market for the first time, and gave it a strong foothold in the Queensland commercial and industrial market.
TOX has also had some good contract wins lately. In August 2013 the company won a five-year $170 million waste management contract with Chevron, commencing this year and covering the energy giant's huge Gorgon project and its general oil operations on Barrow Island, as well as mainland sites.
In January this year TOX won two major waste management contracts, one in Queensland and one in Western Australia. In Queensland, the company will provide waste collection and water services for drilling and camp activities to Titan Energy Services (TTN), which provides services to the Queensland coal-seam gas (CSG) industry, under a two-year contract worth about $17 million.
The WA contract is with Rio Tinto, for total waste management services covering the mining giant's Dampier Salt operations in the Port Hedland and Dampier regions. This is also a two-year contract, but TOX has not given revenue estimates for the project.
In the December half the company also won a waste and industrial services contract for Cement Australia’s Tasmanian, Brisbane and Gladstone operations, through Wanless.
Tox Free is now one of the largest industrial service and waste management businesses in Australia, with 57 operational sites across all states and the Northern Territory. The company employs more than 1000 people nationally, and operates a diverse range of industrial and waste services to all market sectors. That’s not bad for a company that had two sites in Western Australia when it listed on the ASX in 2000, employing 20 people.
TOX’s strategy revolves around growing the three business areas, based around regional hubs: Technical and Environmental Services, which holds the high-margin hazardous and industrial waste management operations; Total Waste Management, which provides waste services to the municipal, commercial, industrial and construction markets across Australia (a capability added with Wanless); and Industrial Services, which offers a range of onsite industrial services to the mining, oil and gas and infrastructure industries, including industrial cleaning, vacuum loading, contaminated site remediation, high-pressure water jetting, tank cleaning, non-destructive digging, emergency response services and disaster recovery. TOX’s major competitors are Veolia and Transpacific.
Tox Free became Australia’s leading provider of hazardous waste solutions in 2012 after acquiring its competitor Dolomatrix. The company is one of Australia’s only licensed HAZMAT emergency incident providers, with a 24-hour callout service to manage the clean-up of spills and environmental incidents throughout Australia. Its portfolio of treatment technologies includes its proprietary thermal desorption technology, which is defined as a BDAT (Best Demonstrated Available Technology), by the US Environmental Protection Agency, and has been applied successfully in a large number of operations including the treatment of contaminated soil, sludge, refinery sludge, pesticide-contaminated soil and material, pyrolisis (decomposing by heating to high temperature in the absence of air) of rubber and plastics, and waste-to-energy plants (TOX is building a waste-to-energy plant in the Pilbara region of WA.)
The technology has successfully processed used car tyres, turning them back into their original constituents, being carbon black and high-calorific fuel oil. The fuel oil is suitable for electricity or energy generation and the carbon black suitable for reuse in the manufacture of new tyres.
What the market might be missing with the May-June hammering it has given Tox Free is that it is a much more diversified business than it was several years ago. The commercial sector generates most of the company’s revenue, at 25%; followed by oil and gas, 22%; the government sector, 17%; mining, 14%; manufacturing, 12%; and infrastructure, 10%. Far from being a wholly resources-based play, the company says that more than 40% of its revenue is leveraged to the broader Australian economy. Also, more than 60% of revenue is secured by long-term contracts.
Despite the downgraded earnings expectations revealed this week, the outlook for Tox Free is still promising, with a $4.8 billion market available to the company, and healthy scope to build its market share further through organic growth, winning new contracts and making strategic acquisitions – all of which TOX has shown itself to be more than capable. The company’s recent contract wins should start to flow through to second-half growth, and although investors should expect earnings estimates to be re-calibrated following this week’s more sober guidance, Tox Free is still looking at about 22 cents a share in earnings in FY15, up from about 19.1 cents this year.
That places TOX, which is capitalised at $434 million, on just under 15 times earnings, which arguably restores a bit of value to the stock. There is more stability (of contracts) and diversification of earnings than many people think – Tox Free is still commonly spoken of as a “resources industry service supplier.” Of course, it is that – but it is far from being only that.
Analysts still think the stock is about 7% under-valued compared to their consensus target price, and while the sub-2% dividend yield is nothing to write home about, Tox Free should be considered a stock that is consolidating its new businesses nicely. But investors might have to look forward to FY15 for the stock to once again find clear water on the market, now that there is a slight cloud on the FY14 result.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au