Issue 064 www.tenbaggerquarterly.com December 14th, 2006 10 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. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 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
DMX Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held