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Issue 064 www.tenbaggerquarterly.com December 14th, 2006
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BUY: DOLOMATRIX
ASX Code: DMX
It is not often we find a fast growing “toll road” trading at a
deep discount to true value. But Dolomatrix, a toxic waste
treatment company, offers just such an opportunity.
Hazardous waste treatment is arguably more of a “toll road”
than an actual “toll road”. Producers of toxic waste are required
by law to have it treated, yet few people will consent to a new
toxic waste dump opening in their neighbourhood. Hazardous
waste treatment is also a dangerous business, and obtaining a
government license is a long and costly process. The significant
obstacles in establishing new toxic waste treatment facilities
mean that incumbent operators effectively enjoy a legislated
monopoly, enabling them to earn incredible profit margins.
Dolomatrix has long been a very ugly duckling. The company
listed in 2001 to commercialise its “Dolocrete” hazardous waste
treatment process, which turns hazardous waste into safe solids
at low cost, but long delays saw the share price decline 97% to
15c by early 2006. However, the company’s fortunes have been
transformed by the recent acquisitions of hazardous waste
treatment firms BCDT Group and Chemsal Resource Recovery.
Highly regarded Chemsal currently operates two fully licensed
hazardous waste treatment and storage facilities in Melbourne
(Laverton) and Sydney (Weatherill Park), taking a “full service”
approach in handling everything from decontamination,
specialist waste transport and treatment to resource recovery.
Dolomatrix’s other major acquisition, the BCDT Group,
operates licensed facilities in Queensland and Victoria for the
destruction of toxic wastes contaminated with pesticides
including PCBs, HCBs, and DDT. Collectively referred to as
Persistent Organic Pollutants (POPs), these biohazards have a
prolonged life cycle in the environment, and can only be
processed by specially licensed facilities. BCDT and Chemsal
operate the only Australian facilities licensed to destroy POPs.
In addition, BCDT’s Victorian plant holds the only Australian
license to destroy potent greenhouse gas trifluoromethane and
organic chemicals such as PCBs, halons (once used in fire
extinguishers) and CFCs (banned refrigerants). BCDT employs
its proprietary “Plascon” technology to convert these hazardous
gases and liquids into harmless solids.
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There are now ten Plascon units around the world. A Plascon
plant is a solid little earner because under the Kyoto Protocol
developed countries pay carbon credits for projects that
reduce greenhouse gas emissions – such as destroying
trifluoromethane, which has a global warming potential 11,700
times that of CO2. At the going rate of over $20 per tonne of
CO2, the rate per tonne of trifluoromethane is over $200,000,
which exceeds the cost of destruction more than twenty fold.
Add that to the fact that Plascon destroys around a tonne per
day, and the economics for customers are compelling.
BCDT used to sell Plascon plants for a one-off fee of $1.3m,
but secured recurring revenues in a recent sale to Venezuela.
“Advanced discussions” are progressing for similar deals.
Dolomatrix’s original Dolocrete technology is also showing
promise. Management is “confident” of selling an exclusive
South African license for Dolocrete for US$15m, with
regulatory approvals already underway. Heads of Agreement
have been signed for Saudia Arabia, Thailand and Malaysia.
Dolomatrix management is forecasting “strong organic
revenue growth across each business unit” in FY2007, with
Chemsal building two new waste treatment plants and BCDT
expanding its Victorian facility. In addition, BCDT has won new
contracts and has secured increased treatment prices.
We forecast Dolomatrix will earn a profit after tax of $7.5m
for FY2007, rising to $11.5m in FY2008, from organic growth
as well as the realization of synergies from integrating
Chemsal, BCDT and Dolocrete. With a current market
capitalization of $96.0m, DMX shares are trading at a FY2008
forward P/E of 8.3. Given the low risk monopoly
characteristics of toxic waste treatment and strong growth
potential from technology licensing, we expect the shares to
be re-rated to $1.80-$2.50 over the next 18-24 months. BUY.
March 2006 December 2006
Dolomatrix