the article in the australian

Don't bin waste

* CRITERION
Tim Boreham
* March 09, 2007

Tox Free Solutions (TOX) $2.10
Dolomatrix (DMX) $88.5c
LET'S talk rubbish: tongues are wagging about another shakeout of the waste management sector, with these two junior entrants expected to play central roles.
While both outfits have grown by consolidating smaller private players, there's a good chance one of them will be at the receiving end of a takeover offer before too long.

Tox's share price is behaving suspiciously like that of a takeover target, although we gather there's nothing solid on the table.

The WA-based minnow's shares have gained close to 50 per cent since February 8, just before it announced the $13 million acquisition of Kimberley Waste Services.

The purchase was well received - it fits nicely with Tox's Port Hedland operations - but that only explains a portion of the share appreciation.

Tox has been kicking goals in its own right, helped by its monopoly status in some parts of the waste chain (Tox has the state's only industrial waste incinerator, at Port Hedland).

Tox has won plenty of fans during its dramatic recovery over the last two years and it's possible the strong share price reflects management's "under-promise, over-deliver" mantra.

The company is also making more purchases. "As far as we are concerned we are just as acquisitive as on day one," says executive chairman Ian Burton.

Tox's net profit is expected to more than double this year and broker JP Morgan expects 33 per cent cumulative annual EPS growth over the next five years. "Tox's balance sheet puts it in a strong position to make further capital investments and acquisitions to drive its ongoing earnings growth," the firm says.

Still, every company has its price. For the Queensland-based Transpacific Industries (TPI, $10.07) Tox would fill a regional gap in its already vast repertoire. Some ponder why it didn't move long ago, but we suspect cultural differences.

Another scenario is a tie-up between Tox and Dolomatrix to create a fifth force behind the national titans TPI and the foreign-owned Cleanaway, Collex and SITA. Again, the corporate cultures might not gel.

On price at least, dumpster divers suggest the unloved and lesser known Dolomatrix as the more appealing target.

In contrast to Tox, Dolomatrix shares have plunged since the company announced two acquisitions in late January: Enviropacific Services and Entech Industries.

Last week's poor interim result didn't help: EBITDA of $2.7 million on sales of $12.3 million. The company has struggled to integrate Chemsal, an earlier acquisition.

Tox is generally seen as better managed and has benefited from the WA resources boom. A Tox specialty is dealing with hydrocarbon waste.

As an east coast player Dolomatrix is closer to more polluting industries. The higher value of land relative to WA also boosts the incentive for users to clean up contaminated soil.

Dolomatrix also has its own proprietary waste disposal technology which it's testing out in Venezuela and Saudi Arabia, of all places.

The takeover chatter comes after a frenetic 12 months which saw TPI buy the listed New Zealand Waste Management (thus getting into the solid-waste game) and rubbish dump operator Baxter Group.

Barbarians Kohlberg Kravis Roberts also won the keenly-fought tussle for Brambles' Cleanaway, edging out TPI along the way despite the latter's $1.8 billion offer.

While TPI is the likely suspect, no-one would be surprised if KKR cleans up some more operators.

There's obviously plenty to buy outside of the big four: at last month's interim presentation TPI management referred to five "imminent" bolt-on buys and a further 26 subject to confidentiality agreements.

Criterion has been an avid Tox admirer, last rating the stock a BUY at $1.16 on March 30, 2006 (adjusted for a one-for-eight share consolidation).

Investors would be foolish to bin the stock, but given the apparent takeover premium already factored in we wouldn't rush in to buy either. So that makes Tox a HOLD, or maybe long-term buy.

We rate Dolomatrix as a BUY. Despite the poor first half, Bridges senior analyst Gregg Taylor expects the company to post a full-year net profit of $10.5 million and EPS of 8.3c.

"The investment case for Dolomatrix remains on the back of the quality of the underlying business," he says. "Management is yet to be proven."

The Enviropacific acquisition is on track to be completed by April 2007 and should chip in $4.5 million of this year's expected EBITDA of $16.8 million.

TPI is a fine, well-rounded operator, but is trading on a high multiple of 27 times current earnings. In our view the stock is a HOLD.

They're all attractive buys at the right price. In the words of JP Morgan: "Growth in industrial production and increased urban population levels have resulted in an unremitting escalation in the volume of waste generated in Australia."

That's not rubbish.