tox preliminary f/y - crunching the numbers, page-26

re: tox preliminary f/y - my analysis Hi all,

Remember if TOX has produced profits in excess of forecasts, it really should not shock us as we should already know that the company were very conservative in their estimates.

Following are extracts of earlier posts from myself just explaining why TOX estimates were severely underestimated.

Great times ahead for TOX holders.

This is only the beginning.

Cheers
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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.




I have also just noted another example of management downplaying profit forecast for 2005/06.

Revenue is projected to be $8 mil for 05/06.

However if one looks at revenue inflows for the first half of this year, a total of $4.4 m was received (Obtained from the March and June quarterly reports this year). If you take out the GST, revenues would be $4 mil for the first half of this year.

However it should be noted that:

Debtors as at 31 Dec 2004: $830k

Debtors as at 30 June 2005: $1.43m

Therefore you would need to add back the increase in debtors between 31 Dec 2004 and 30 June 2005 to calculate the additional increase in revenue for the period.

Therefore revenues for the first six months of the year would be:

$4.4 m - $400k GST + $600k (increase in debtors) = $4.6 million.

Therefore even if the company experiences no growth in 05/06, sales woud be a base figure of approx $9.2m.

Revenue forecast has therefore been understated by approx $1.2m for 2005/06.

This is further reason, in addition to my previous posts that the base EBITDA figure of $3m for 05/06 has been understated significantly.

Remember that a base figure of $9.2m assumes NO growth at all.

Plenty of exciting times ahead for TOX holders.