tox preliminary f/y - crunching the numbers, page-17

re: tox preliminary f/y - my analysis Hi Jabba

Great post mate! Im going through the report now also and doing analytical reviews to see if I can add anything extra.

I noticed that EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) for the first six months of 2005 was $1,958,000.

This is really the figure we should be looking at. I’m sure once the options are exercised early next year and TOX raises $3.2 million, much of it will be used to clear the remainder of long term debt and any other current interest bearing liabilities lingering on the balance sheet. Interest expenses will therefore decrease dramatically. In fact $3.2 mil would cover all liabilities on the balance sheet as at June 2005.

Intangibles are only $303k which means only another $303k can be amortised. However, the amortization of intangibles is irrelevant to future cash flows.

Depreciation is irrelevant also. The rate the company depreciates it plant does not affect the net present value of future earnings. That is, cash flow will not be affected.

In addition, income tax for the time being is irrelevant. The company has accumulated losses of $12.8 million.

Therefore given the conservativeness of TOX management, would one expect a base EBITDA of $1,958,000 x 2 = $3,916,000 for the 2005/06 year. Therefore TOX have already underestimated their base profit forecast for 2005/06 by almost $1 million. They should have announced a base profit figure of around $4 million.

The one great aspect of the preliminary report as opposed to the quarterly reports is that the preliminary report is audited, which gives the figures much more substance.

The audited profit was $1.45 million as opposed to $1.42million unaudited profit. It’s about a 2% difference and although not material, it is pleasing that the auditors had to increase the profit figure slightly.

This confirms TOX management’s conservative nature when estimating profits especially given they exceeded expectations by 100% in the first 6 months of this year.

It should also be noted that debtors are $1.4m at June 2005. Therefore we can assume that an additional $1.4m will be received sometime during this year.

In conclusion, the valuation of TOX should take into account a base EBITDA figure of $4 million. Given the continuing operational efficiency improvements at their plants and the many avenues of growth both internally (through upgrades of TDU etc) and externally (through JV/Acquisitions), the base EBITDA figure will be substantially higher than $4 million. As discussed above, this is the figure we should be using as depreciation and amortization does not affect cash flow and will not lower NPV of future earnings and Interest will become more and more immaterial as the year progresses.

I would not be surprised to see TOX at 20c by the end of the year. I have discussed my valuation of TOX in a recent thread titled “valuation of tox”. In that thread, I was using $3 mil as a base profit figure. I should probably go back and adjust it to $4 mil.

Any comments on my post would be greatly appreciated.

Many thanks

Cheers