Toxfree Solutions (TOX) is a niche integrated waste and industrial service provider, with an expansive network of waste management facilities across Australia.
The company has a complete range of waste capabilities; however the leading position in hazardous waste is the company’s key strategic advantage due to the supportive industry structure.
Tox became the leading provider of hazardous waste solutions in FY12 after acquiring its competitor Dolomatrix. Apart from hazardous waste, the company also provides collection, recycling, treatment and disposal of a broad range of solid, liquid, and industrial waste.
The ownership of hazardous waste treatment sites creates high barriers to entry, resulting in low competition and high earnings margins (earnings before interest, tax and depreciation margins above 40%). The requirement of an EPA licence, and planning approval for these treatment sites prevents multiple sites in the one location.
The company has specifically focused on regional hubs, with a large amount of current and/or planned mining and energy projects. Once this position has been established within hazardous waste, the company can then expand into other waste management solutions within the region, again with minimal competition. Examples of the company’s successful strategy can be seen in the Surat Basin, Gladstone and the Pilbara.
Tox was established and listed on the ASX in 2000, initially with two sites and 20 people. Now the company has operations in 56 facilities and employs a team of over 1,100 people.
In 2005 Tox was relaunched with the appointment of a new management team, led by managing director Stephen Gostlow, that developed a strategy focussed on the provision of a broad range of waste treatment solutions for all types of wastes produced by industry. This same strategy is successfully employed today.
Gostlow has been with the company since 2002, and has done an excellent job, highlighted by the successful integration of acquisitions and excellent earnings growth. The other members of the management team have been appointed from 2009 to 2011 and collectively represent a united team, which is building an excellent track record of creating shareholder value.
Chairman Robert McKinnon has previously been managing director of Fleetwood and Austal. With 30 years of senior financial and general management experience, he provides the appropriate experience to lead a capable board
A competitive landscape
The metro municipal waste market has traditionally been avoided by Tox due to its poor structure, with high competition and low barriers to entry. There are many smaller players in this market and a couple of large global companies, and hence earnings margins are thin and constantly under pressure. Tox’s major competitors are Transpacific Industries (TPI) and the French-owned Veolia.
The commercial and construction waste markets are also competitive with a poor market structure, and hence Tox limits its exposure. The industrial market, whilst not as attractive as hazardous waste, still provides a supportive industry structure with regards to low competition. Hence Tox is aiming to grow its exposure.
Defensive earnings profile
The company’s earnings, while experiencing excellent growth, also have a defensive nature due to industry contracts being long term (3-5 years) and its whole-of-project-life cycle exposure. This is especially relevant for liquefied natural gas projects, where Tox’s services will be maintained or increased once the major projects become operational.
A major industry theme is the shift away by governments from landfill sites towards greater waste treatment/recycling. Tox is a major beneficiary of this shift as it has no exposure to landfill assets, and it will benefit from a greater amount of waste treatment/recycling activities. Government initiatives include increases in landfill levies, the provision of paper and organic municipal recycling collection services, and more stringent regulations governing waste disposal methods.
While the resources sector capex spending for major capital projects has reduced, the market for servicing producing assets is large, and Tox is well placed to benefit through its strong relationships with many of the major resources companies in the country. These include Toll Energy, Apache, Bechtel, Chevron, Rio Tinto, and Titan Energy Services.
A diverse exposure
The company’s tender book remains strong, with a number of submitted tenders pending. In recent times resources and oil and gas contracts have been strong, while manufacturing and commercial has been weak. Although resources has been a key focus, Tox also has a diverse exposure to the broader Australian economy.
A large percentage of the company’s growth has been through strategic acquisitions, with an excellent track record of successful integration. In recent times the most significant acquisition was “Wanless” in April 2013, and its operational progress will be one of the key components of the half-year result. The company’s acquisition strategy is focused on companies that can expand its geographical reach and provide services that can be easily integrated into the current mix.
Tox has recently announced two new contract wins – one a renewal of its long-term contract with Rio Tinto, and also Titan Energy Services, which supports the growing coal seam gas (CSG) industry in Queensland.
In summary, we are attracted to the mix of defensive earnings and high-growth opportunities at Tox. The barriers to entry from strategically located waste treatment sites with unique licences provide an excellent framework to expand its customer base and service offerings, both organically and by acquisition.
While we are confident the company is trading at a discount to long-term valuation, and have an outperform recommendation, our earnings and price target are under review prior to the half-year result.
|Toxfree (TOX)||FY14 Forecast|