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Results Update: Platinum Gilded Numbers & Close to Light at the End of the Tube

Joshua Baker

Capital H Management

Earnings season is the premier event of the investing calendar with more results to read than you can poke a stick at. With reporting now largely over, I think it would be good to touch base on the FY19 results and FY20 expectations for two companies, which I have detailed on Livewire in recent months, XRF Scientific and Tubi Group.

XRF Scientific Update: Platinum Gilded Numbers

Overall, XRF reported a great set of results with revenue reaching a record level of ~$29m, which was ~20% higher than FY18. All three divisions contributed to the result, with the Precious Metals (PM) division leading, growing by 19.4% to $13.1m in revenue as the prior investment and expansion of this business unit bears fruit. Capital equipment delivered a record result, capitalising on a strong capex cycle from their customers. The Consumables division grew a more modest 6.2% for FY19 (expected 8% to 10%), which was a little disappointing considering how exploration spend and metres drilled tracking over the year.

In addition to record revenue, operating margins showed improvements across each division with group EBITDA margin increasing from 10.1% to 14.2%. Strong revenue growth in conjunction with strong margin expansion led to strong growth in profitability and free cash flow generation. EBITDA grew 67% to $4.1m whilst operating NPAT grew 108% to $2.1m. With ongoing investment requirements into the business moderating, also boosting free cash flow, this allowed for a higher dividend, which was well ahead of my own expectations as XRF declared a dividend of $0.010 versus my expectation of $0.007.

Notably the German office achieved profitability in the second half of FY19 with +$57k. For the whole FY19 period, the office reported a loss of 57K. The improved performance in this office, coupled with other one-off expenses from investment saw margins in the PM Division expand from 1% to 7%. As this part of the division hits scale, and with a strong pipeline of customers to drive top line growth, I expect the margins in the PM division to continue to expand significantly, at least moving back towards historical levels (average of ~12% since IPO) and be a key driver to overall profit growth for XRF in the next 2 to 3 years.

Looking forward to FY20, I believe XRF is well positioned to deliver strong revenue growth at a rate in line with that achieved in FY19. I think the PM division is positioned to deliver 15%+ growth, whilst Consumables should be placed to track between 8% to 10% growth. In my view, the biggest risk to revenue growth could be from the Capital Equipment division. Whilst management reiterated that the order book level remains at highs, which suggest YoY growth is likely, revenues can be lumpy, which can make a record FY19 result for the division a tough comp.

With margins still below long-term historical averages in each division (PM division exampled in the graph below), I believe that XRF still offers strong operating leverage. Should XRF achieve revenue growth consistent with that of FY19, and margin expansion in line with my expectations, this could result in NPAT and Dividend growth in excess of 50% for FY20.

At the time of my original article in May 2019, XRF traded on an EV/EBITDA and P/E multiple of ~5.5x and ~10.5x respectively for FY19. Based on my forecasts for FY20, XRF trades on an EV/EBITDA and P/E multiple of ~4.9x and ~8.8x respectively. In addition, assuming a payout ratio of ~65% is maintained in FY20, XRF would offer investors a net dividend yield of ~7.5% today. I reiterate that given the level of growth, improved diversification and quality of their product offering, I believe XRF should trade towards the top end of their peer group which is still largely considered mining services. This equates to an EV/EBITDA multiple of around ~9x or a P/E of 15x+ and implies fair value for XRF in the mid to high $0.30 range.

It is also worth noting that XRF has stated that it is still looking to continue to make acquisitions that can enhance its market position or add a complementary product to its offering. However, if in 2 to 3 years and the company hasn’t made any material acquisition nor identified another significant opportunity to re-invest back into the business, it is likely that cash will continue to pile up on the balance sheet. In this scenario, I believe the company would be able to make a material capital return to investors via a special dividend, which would also allow XRF to distribute the benefit from the $5.7m in franking credits accrued on the balance sheet.

Tubi Group Update: Close to Light at the End of the Tube

With the company listing so close to the end of the FY19 period, there wasn’t a lot expected with most of the action of the investment thesis occurring in FY20. However, to start listed life on a positive note its always best to meet or beat prospectus numbers with little is and reaffirm longer dated guidance, which is what 2BE largely achieved.

Whilst revenue came under ~1% under forecasts, the company was still able to exceed profitability metrics as outlined in the prospectus. The one notable point is the lower than expected operating cash flow for the period, which came in at $2.6m versus $4.4m in the prospectus. Both cash receipts and outflows where higher than forecast, however, the increase in cash outflows outpaced the higher level of receipts. I believe this comes down to timing of items such as invoicing, deliveries and resourcing requirements ahead of planned growth, rather than any observable fundamental issues. However, this is a key area to focus on closely near term, although I believe 2BE listed with the financial buffer to manage these sort of cashflow timings.

Alongside the FY19 results, 2BE provided a business update covering FY20 in which guidance was reaffirmed. Key to note is that delivery of all the additional plants are tracking ahead of schedule. The Iplex plant was shipped right at the end of August (versus September) whilst the second MPS plant is expected to be delivered and producing pipe under contract in late September rather than during October/November. In addition, plants 3 and 4 are being focused on water and mining opportunities and are slated to be contracted, delivered and producing earlier than initial prospectus forecasts (Early versus late 3Q FY20). It is also good to see the firmer commitment to diversify the customer base of the company. Should this revised timeline be maintained, whereby the additional plants are producing for longer than expected, its sets the tone for 2BE to be able to beat prospectus guidance for FY20. 

Below is an updated version of the key catalysts list I outlined in the original write-up with underlined text detailing the update to original timelines provided.

  • Meeting FY19 prospectus numbers (August 2019). Broadly achieved
  • Completion and delivery of the Iplex plant (September 2019). Achieved ahead of schedule in late August 2019
  • Completion and delivery of the second plant to MPS Inc (Oct/Nov 2019). On-track to be achieved ahead of schedule in September 2019
  • Completion and delivery of the third and fourth plants (est. Feb 2020 and March 2020 respectively). On-track to be achieved ahead of schedule in early 3Q FY20
  • Contracting the third and fourth plants (2H FY20). On-track to be achieved ahead of schedule in late 1H FY20
  • Meeting FY20 prospectus numbers (August 2020). TBA
  • Details of further plant production plans and contract opportunities (2H20). TBA

Whilst the FY19 results were not the ‘knock out of the park’ one would hope to see, I think it still demonstrates that the business is on-track and positioned to deliver it’s FY20 growth objectives, which is key to the original thesis and generating returns for investors.

Disclaimer: Any information contained in this article is limited to general information only, whilst the opinions and views detailed are those of the author only, and as such does not constitute advice or a recommendation in any capacity. The information contained in this article has not taken into consideration your specific financial needs, goals or objectives, so please consider consulting a licenced adviser before considering acting on this information.

XRF and 2BE are small and illiquid companies, and like all companies, they have uncertain futures. Therefore, an investment in either company should be considered high risk. The author owns shares in XRF and 2BE at the time of publishing.


2 stocks mentioned

Joshua Baker
Portfolio Manager
Capital H Management

Joshua has worked as an Investment Analyst across different verticals of the financial sector for 9+ years. Experience includes equities research (long/short), manager research and multi-asset portfolios.

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