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.
TOX Price at posting:
$2.33 Sentiment: None Disclosure: Held