My thoughts are it sits somewhere between the poles. Return to 2022 operating margin might be a bit of a stretch on the one hand as that was partly on the back of overstocking (supply chain concerns), a short-term tailwind which has reversed. I think that also coincided with the Adblue shortage, which may repeat but I wouldn't necessarily count on it. I've reviewed a number of players with varying business models and geographies in chemical manufacturing and distribution (e.g., BASF, Azelis, Redox and Mainfreight), and it looks like industry conditions really have been tough. Toffcap whose research has been posted on here previously is interested in the specialty chemicals industry due to the trend of outsourcing of distribution from the global manufacturers to specialist distributors, on the basis of complexity of end markets, but I think he understands capital light companies like Azelis better than he understands the prospects of DGL. He at least has not addressed these details yet as far as I'm aware. This outsourcing might provide an ongoing tailwind for DGL. If DGL's increasing size and 'end to end' service really is a competitive advantage, we might see margins expand on that basis as well but that is of course purely speculative. It seems they have intense competition amongst all 3 arms, although there is stated to be consolidation. Employee costs are looking a bit bloated at the moment. It will be interesting to see how that evolves. Plenty of adverts on seek at the moment, and I think difficult to recruit in a relatively dangerous industry which is out of vogue.
I would love to get some more insights into Ixom (formerly the chemical arm of Orica), as I understand they are DGL's largest competitor on the manufacturing side of things in Australia and NZL. I can't quite get my head around how DGL fits into the broader scheme of dangerous goods - there are a lot of players - it makes sense to me that you would get the same company that formulated and manufactured your chemicals to both store and transport them to customers - this seems like a pretty big advantage to me, but I understand the DGL business goes beyond this to transport pharmaceuticals and good etc and I'm not sure what the makeup is. I would think the bulk of revenue is from the transport and storage of industrial chemicals, as companies like Ixom and Redox will engage DGL for this purpose. Seems like a strategic advantage as against the other manufacturers, but distributors like RDX for example have the advantage of being capital light. In any case, I only see a company like RDX in limited competition with DGL, in respect of chemical formulation, but I don't know the extent of how they compete in this area.
With regards to waste treatment, I think they will be dealing with different customers in this arm of the business (i.e., the companies producing wastewater and collecting ULABs) rather than the chemical companies and distributors, although they will likely provide services to other chemical manufacturers who they also provide logistics for. At the same time, it does make sense - their business is chemicals, they will need to deal with their own wastes. They have the transport infrastructure and they are all into the regulation, so I see the rationale behind the strategy. I think they can get other benefits like recycling aluminium from aluminium smelter wastewater into its production of pool chemicals as well; but whether this provides a competitive advantage over larger waste businesses like CWY, I am not sure. I know a lot of waste infrastructure is very specific to the type of waste treated and I'm not sure how heavily CWY (and other providers) are in the business of dealing with wastewater/acid type wastes.
Would love to hear thoughts on any of these issues. DYOR
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