Order book Specific profit guidance for FY11 has not been provided. However, management expects contracts awarded in the latter part of FY10 to contribute to significant growth in FY11. Furthermore, Envirochem, acquired in May 2010 for A$3m, is tracking well and should contribute at least A$1m to EBIT in FY11. Our estimate of TOX?s contract profile is summarised below. Based on our forecasts, additional revenue from contracts awarded during FY10 and FY11 will represent approximately A$25.5m of the A$30m increase in revenue we have forecast for FY11. There are plans to upgrade or relocate the incinerator from Port Hedland to Karratha, however, this could be 12-18 months away.
Changes to our forecasts Changes to our forecasts are summarised in the table below. Key changes relate to higher capex requirement and associated depreciation, higher corporate overhead and A$1.4m for provisions for doubtful debts. Acquisitions and potential from QLD flood clean up are not included in our forecasts.
Valuation, target price and risks TOX is on the cusp of significant growth from FY11 and FY12. We apply a PE valuation multiple to value TOX at A$2.44 per share. We apply a PE multiple of 13.75x to our revised FY12 EPS (basic) forecasts, which is a 20% premium to the small industrial index of 11.5x but below its larger competitor, Transpacfic Industries (TPI), which trades on 15.4x FY12. We believe the premium to the small industrials is justified given TOX?s oligopolistic position in particular market segments, solid balance sheet, above-average margins and significantly higher EPS growth profile (average 42% pa for FY11-12F vs small industrials? 17.5%pa). Growth forecasts for FY11 are underpinned by a ramp-up of contracts awarded in FY10 and FY11, including Gorgon, Rio Tinto, Murrin Murrin, Boral Cement and Apach. The company continues to tender for more contracts and is confident of further awards. The tender book is in the order of $70m, and near-term prospects include Port Perie and Wheatstone. We continue to like TOX?s long-term outlook for its leverage to the resources and oil and gas sectors, strong balance sheet and a strategic market position. However, as the shares are now trading within 10% of our revised price target of A$2.39, we move to a Hold rating. Upside risks include new contracts, acquisitions, longer-than-expected impact of the flood clean up and faster-than-expected recovery in the manufacturing sector or corporate activity. Key downside risks include acquisition integration, losses on contracts, regulatory change, a slowdown in construction activity and a slower-than-expected recovery in manufacturing and operational risks.
TOX Price at posting:
$2.33 Sentiment: None Disclosure: Held
