rbs report

Tox Free Solutions

Flood clean up underway
TOX's 1H11 result is likely to be softer than prior expectations due to wet weather
delaying construction on the East Coast. TOX is mobilising to QLD to assist with
the post-flood clean up, which should boost 2H11 result. Downgrade to Hold.

Wet weather stalls construction in 1H but offset by flood clean up in 2H
Wet weather on the East Coast over the last two months has stalled construction activity,
which has lowered waste volumes. However, this is likely to be offset as TOX mobilises
equipment from the south into QLD to assist with the clean up after the floods. The extent of
the potential upside of the clean up for TOX is not yet known and is not in our forecasts.
We reduce FY11 forecasts by 7%
Our FY11 NPAT forecast has fallen 7% driven by higher overheads, including the addition of
a COO, increased capex from A$18m to A$21m, lower margin expansion assumptions and a
A$1.2m provision on a doubtful debt. We estimate A$24m of our A$30m (30%) increase in
revenue forecast for FY11 is secured under new contracts. Thus, in the event of no further
contracts only 6% organic revenue growth is required to meet our revenue forecast.
Growth beyond FY11 remains robust ? A$70m tender book, targets East Coast
TOX has A$40m-45m secured under contract for FY12 and has a A$70m tender book across
blue chip mining, industrial and LNG clients. Assuming an average contract length of 2.5
years and 50% conversion rate this translates to a further A$15m pa in revenue. This,
together with the additional A$5m from ramp of contracts commenced in FY11, underpins
our revenue growth forecast of A$20m in FY12. The recent appointment of Peter Goodwin,
previously 2IC at Veolia Australia, adds management depth and experienced in contracts
>A$50m to the TOX team. TOX estimates the Australian market at cA$1.5bn, providing
plenty of opportunity for further growth. Target markets include coal and further penetration
into the east coast.
Good long-term fundamentals but we move to Hold following recent price strength
We apply a PE multiple of 13.75x FY12F EPS to reach our A$2.44 price target, which is
between the small industrial index?s 11x and its closest peer, TPI, at 15.4x. We continue to
like TOX?s long-term prospects but move to a Hold in the short term and will reassess at the
result and when we have clarity on flood impact. Contracts, acquisitions are upside catalysts.