FY23 results were headlined by $55.26m total revenue (up 38% from $40.0m); NPAT $7.7m (up 26% from $6.1m). Earnings per share came in at 5.6 cents and a dividend of 3.3cps (fully franked) was declared, indicating payout ratio of 59%.
Sales revenue from external customers up 38%, leading to underlying PBT growth of 44% and demonstrating some remaining operating leverage within the business. In total PBT came in at $11.79m on $55.26m sales revs, where I had estimated $11.0m on $53.1m sales. Segment makeup was a little different to what I had anticipated, particularly with higher than expected contribution from Orbis and much higher than expected margins across the entire capital equipment segment:
(1) Capital equipment & Orbis
I noted previously that, prior to acquisition, Orbis was operating on higher operating margins than the existing capital equipment segment (~15% vs ~10%). This dynamic has shone through, with margins for the segment as a whole improving sharply from 10.6% in FY22, to now 18.1% in FY23. Management had disclosed that Orbis contributed PBT $1.4m, half of which belongs to minority interests (the previous owners), on $6.1m in sales. Implied margins of 22.95% at PBT level materially exceeds the pre-acquisition margins of just under 15%.
I note that margins across the segment ex-Orbis have improved significantly as well, from 13.25% in FY22 to now 17.64% in FY23. The proliferation of alternative ‘Lab Equipment’ product lines (drying ovens, pressing and pelletising, as well as the newest xrTGA units), which unlike the company’s flagship x-ray fluorescence spectrometers do not take consumable inputs, will continue to necessitate capturing higher margins upfront (likely >20%). I will be very interested to see how far management can push this dynamic, but in the interest of conservatism, I will assume margins remain essentially flat for FY24. Any risk on this estimate is most likely to the upside.
Management has commented that the new and acquired product lines are expected to be a key growth driver moving forward, noting that outstanding order books are at historical levels and include orders out to the second half of FY24 already.
(2) Precious metals & labware:
I had previously noted that margins within the precious metals segment may have been under some small amount of pressure, though any negative impact realised by the business has been limited. Management have taken particular care to point out that they have been actively managing pricing within the segment in order to mute the impact of rising input costs on shareholders.
Management also noted that newer technology in the company’s Melbourne-based precious metals facility has been experiencing higher margins than elsewhere within the group. Productivity gains have been noted, this corresponding to around $200k increase to capital expenditures within the segment. Total capex was around $400k higher than FY23 at group level as production capacity is increased across all business segments.
Previously, I had felt that management had implied the company is using Australian facilities to complete orders for European customers. If XRF can increase the proportion of its cost base denominated in AUD in return for revenue denominated in EUR, this should support margins to the upside in at least the very near term. As yet, any evidence this has been a factor is limited, noting the increased utilisation of the German facility appears to be tracking roughly in line with the expansion of capacity at the Melbourne facility.
(3) Consumables:
Management had previously noted that input costs pressures within the consumables segment, primarily related to lithium, were expected to subside at some point in around the second half of FY23. Current updates indicate that this has gone as expected and that the expansion of working capital requirements has relented towards the end of the fiscal year. Since the end of FY23, we can now say for sure that lithium prices have fallen sharply, somewhere in the order of 70-80% over the course of calendar year 2023.
Lower input prices for lithium should support a sharp increase to margins within the consumables segment. As I have said previously, I am interested to see how far management can push things here given the generally very favourable current environment for mining activity.
FCF: (simply CFFO-CFFI) came in at +$7.63m, backing out $507k occupancy expenses and adding back net financing costs of $135k gives $7.26m. $4.5m in dividends, or around 62% of FCF will be returned to investors, with the company banking around $3.75m cash in the interim and paying down borrowings in the order of around $750k.
Non-cash working capital requirements are currently $15.29m, up $1.38m or 9.9% on end FY22 ($13.91m). Almost all of this change relates to an increase in inventories, this year most notably an increase to ‘finished goods’ of ~$1.1 or 42%. Precious metals stock was increased by almost $2m, 59% higher than end FY23. The prior year blowout of ‘raw materials and spare parts’ reversed somewhat, with a decrease of ~$600k. Management described that pressures here eased in the second half of FY23, which is in line with the expectations they had offered to the market previously. Trade receivables were up $2.4m following the very strong Q4, though payables and other current liabilities were up to offset the working capital impacts.
Total capex came in at $760k, ~$400k higher than FY23 and ~$240k higher than the depreciated amount. Management have noted that with multiple product segments operating at or near capacity, increased production capacity for machines will be a focus area of 2024, also flagging additional staffing requirements associated with these planned increases.
Starting with an estimated NPAT of $9.60m, less Capex outpacing depreciation by $400-$500k and assuming that further changes to working capital requirements are minimally impactful, somewhere around $9m in FCF is implied for FY24. If XRF banks $2m in cash and repays $780k in short-term borrowings, a dividend of up to 4.5cps might be possible.
Miscellaneous: the company wrote off $27k (FY22: $66k) in impairments for bad receivables and ~$111k for bad inventory (FY22: $130k). These points remain unconcerning.
The opportunity in my mind is much the same as it has been previously: increased sales & utilisation from the now-profitable German facility to drive revenue and margins in the precious metals segment; increasing ‘installed base’ of capital equipment to drive revenues and margins in the consumables segment. The recently acquired Orbis and other ‘adjacent’ new product lines should drive revenue and margins higher for the capital equipment segment.
Key risks remain obvious: cyclicality of revenue and rising input costs. Management again spoke to both, reiterating that the mining sector remained a key driver of increased activity across all segments. Input costs again rose, particularly in the consumables segment given lithium inputs and their demand from the EV sector throughout the prior year. Operating margins improved modestly to 21.34% (FY22: 20.24%). Throughout the year I had trimmed around a third of my real money position, at lower than current prices (~$0.81), and I remain resolute that a forward P/E ratio of 12 is the right price given these key risks mentioned. The current price of $1.18 at time of writing, implies a forward P/E of ~17x.
Management reiterates “actively monitoring acquisition opportunities in adjacent sectors that will be value accretive,” and I am encouraged by how quickly management have been able to onboard and expand the most recent opportunity with Orbis, however any prospect of further acquisitions remains non-core to my thesis.
Updated disclosure: XRF remains my largest position in both my personal portfolio @ 8.73% and Strawman @ 28.9%
Earlier this week (at time of writing) we saw XRF give results for FY22 and a general update on things for FY23. FY22 results were headlined by $40.0m total revenue (up 25% from $32.15m); NPAT $6.08m (up 19% from $5.13m). Earnings per share was quoted at 4.5 cents and a dividend of 2.5cps (fully franked) was declared, indicating payout ratio of 56%.
Sales revenue from external customers was $40.01m up 28% from $31.29m, leading to underlying PBT growth of 38% and further demonstrating operating leverage within the business. In total PBT came in at $8.10m on $40.01m sales revs, where I had estimated $7.95m on $39.5m sales. Segment makeup was a little different to what I had anticipated, full details of this below and key points highlighted:
The company’s numbers highlighted in the summary results announcement failed to eliminate intercompany transactions so what I have above is marginally less flattering.
1. Precious metals / input costs:
I had failed to properly account for rising commodity prices when thinking about the precious metals segment. I reasonably could have foreseen this, but didn’t think about it at all. Management commented that they were largely able to pass rising costs on to customers - to the same extent to which this is true, revenue must have increased as a function of price per unit and not necessarily the big volume increases I might have initially assumed upon seeing +36.5% revenue growth for the segment.
Notwithstanding the above, operating margins did decline from 19.35% FY21 to 16.0% FY22, for the most part because of COVID-related subsidies in the prior year. The issue is that with the German facility recently tipping into profitability as well as contributing an increasingly large proportion of revenue, I had expected a reasonable improvement to margins. It is a little difficult to work back through and required some guesswork but by my estimation, margins in Aus declined 4-6% on FY21 or around 0.5-1.5% ‘underlying’ after stripping out COVID subsidies. European margins did not look like they had improved to the extent I had anticipated either. For me, this is the one minor point I found disappointing in the report and a risk to keep an eye on if input costs continue rising.
2. Consumables margin:
Margin pressure in (1) was offset by a very impressive increase in operating margins realised within the consumables segment, from 31.05% in FY21 to now 34.05%. I am interested to see just how far management can push these margins, previously I had thought much over 30% would be quite difficult to achieve, however there is precedent. Historically, operating margins within the consumables segment have been as high as 39.13% in FY13, at which point company-level operating margins came in at a total 23.97%.
A high margin for this segment makes sense, because if capital equipment is sold on only modest margins (somewhere in the order of 10%) but XRF consumables are needed for the operation of these expensive machines, essentially the company has forgone upfront margin in order to capture customers ongoing for repeat consumables orders. Consumables are therefore a small but critical component of the lab work being completed by customers and if very high utilisation of the selling and distribution network persists, I can’t see why it would be unreasonable to suggest under perfect conditions XRF could achieve 45% operating margins for this segment.
Noting the high cyclicality of mining expenditure, I am cautious that ‘perfect conditions’ are likely to be fleeting. See Appendix 2 for some history here.
3. Orbis:
Somehow I might have missed the fact this was not going to be a full year contribution for Orbis, or I might have drastically overestimated how quickly the company could onboard everything (I don’t remember and didn’t specifically write this down). In the final 6 months, the acquired business unit contributed $1.8m sales revenue / $125k PBT to the capital equipment segment. Doubling this to annualise shows I was not far off with respect to what I thought the business could achieve, but in total for the full year I was pretty wrong. Management also stated in the footnotes of 23 (ii) that Orbis contributed $1.9m rev and $36k PBT from 30 September 2021 to 30 June 2022, implying a very slow start of only ~$100k sales and -90k PBT for the first (December) quarter of contribution from Orbis.*
I noted previously that Orbis was operating on higher operating margins than the existing capital equipment segment (~15% vs ~10%). This is no longer true as XRF works to integrate the acquisition, though I would be happy to assume that if sales of Orbis machinery are able to grow faster than that of ex-Orbis equipment, segment margins are likely to improve over the medium-term.
Management has commented that the acquired product lines are expected to be a key growth driver moving forward.
*(there is a reason this assumption might be a little wrong- see Appendix 1).
FCF
FCF (simply CFFO-CFFI) came in at +$2.04m, I will back out $467k occupancy expenses before adding back $601k for Orbis acquisition and moving $66k net finance costs lower to CF from financing. A number of $2.24m is workable depending how you like to think about things. $3.4m in dividends is just over 150% of this number (but only 56% of reported NPAT as alluded to earlier), the shortfall of which looks to have been funded by an almost $2m drawdown in debt.
Non-cash working capital I have at $13.91m currently, up $4.13m or 42.2% on end FY21 ($9.78m). Most of the difference relates to a blowout of ~$2.8m in inventories relating to ‘raw materials and spare parts.’ Where inventory increases in ‘finished goods’ and ‘precious metals (general)’ kept pace with 25-30% growth in sales, ‘raw materials and spare parts’ inventory was around 67% higher at $7.0m (FY21: $4.2m). In total, company owned inventory increased by $4.15m since year end FY21. Change in receivables also outpaced change in payables by ~$700k further contributing to the problem, offset by around $800k increase in income tax and other liabilities owing at year end.
Capex looks like it came in at about $150k shy of the depreciated amount which I would still expect to normalise as closer to equivalent, though I assume the company is holding off what it can here until working capital increases subside (estimated Dec 2022). I note management’s commentary that seems to indicate some product lines are operating at max capacity, therefore assuming a modest increase in Capex might be prudent. A property in Melbourne was also acquired in the period, which may have some cash costs for fitting out recognised in FY23.
If we start with estimated NPAT (see valuation below) of $7.7m, less Capex outpacing deprecation by ~$200k, and a further $2m net change in working capital requirements that would imply FCF+ around $5.5m for FY23. If XRF banks $1m in cash and repays $1.1m in import loans outstanding at end FY22, $3.4m leftover implies another 2.5cps in dividends for FY23 (around 44% of NPAT).
Miscellaneous: the company wrote off $66k (FY21: $0) in impairments for bad receivables and ~$130k for bad inventory (FY21: $80k, FY20: $138k). These points remain unconcerning.
Management’s openness to further M&A activity was reiterated, though remains somewhat non-core to my thesis.
The opportunity in my mind is much the same as it has been previously: increased sales & utilisation from the now-profitable German facility to drive revenue and margins in the precious metals segment; increasing ‘installed base’ of capital equipment to drive revenues and margins in the consumables segment. Now also, the recently acquired Orbis and other ‘adjacent’ new product lines should drive revenue (and perhaps margins) higher for the capital equipment segment.
Key risks remain obvious: cyclicality of revenue and rising input costs. Management have spoken to both, pointing out that the precious metals segment in particular is diversifying away from its heavy reliance on the mining sector, as well as noting that rising input costs have largely been passed on to customers. In total, XRF beat my expectation of operating margins for FY22 by a sliver (20.24% vs 20.13%), as well as that of FY21 (18.85%). I am highly cautious of these risks though, and will continue to consider my options with respect to very large position sizing in both personal and Strawman portfolios.
Valuation:
Capital Equipment: ex-Orbis I want to assume $9.5m sales revenue (FY22: $8.3-$8.4m) and for newer Orbis product lines $4.8m (2H22: $1.8m, or $3.6m annualised). Management commentary was particularly strong, stating: “our order book continues to reach new record levels, with production for some product lines booked out for 1H23.” Management also noted $400k of sales had been marginally delayed to 1H23 because of delays shipping finishing parts, which should be a strong head start to achieving a record new year. A new ‘adjacent’ product launch within this segment should positively contribute, though I can’t see any details of this has been disclosed.
Precious Metals: European sales have continued to grow strongly to $6.45m (+44.5% from $4.46m FY21). Assuming $9.0m for this region and only modest growth (likely more so from price than volume increases) to $14.4m for Aus and Canadian regions. A softening Euro may have some impact but given the segment’s reliance on USD-quoted commodity inputs, I’m not actually sure to what extent this will matter. I have ignored this point for now.
Consumables: management notes revenue and costs are expected to continue to rise in FY23, with no negative impact to margins. The only geography really growing for this segment is Australia, however the geography is allocated by the location of the facility that completes the order, irrespective of where it is shipped. Management have noted as well in the past that the German facility is driving increases in other geographies, so I’m expecting this to continue with respect to Aus Consumables / German Capital Equipment.
- Capital Equipment: assuming $14.3m revenue, flat segment margins of 11.2% implies $1.6m PBT
- Precious Metals: assuming $23.4m sales revenue, slight improvement to margins at 16.8% implies $3.94m PBT
- Consumables assuming $15.4m revs on continued improvement to margins of 35.5% implies $5.47m PBT
Total revs of $53.1m / $11.0M PBT implies operating margin @ 20.73% and tax rate of 30% = $7.71m NPAT
Applying P/E multiple of 12 gives $92.47m, add $6.65m cash, less $2.77m debt implies target market cap $96.35m
$96.35m / 135.89m shares on issue = $0.709 per share
If management are able to further flex in terms of Consumables segment margins to 37.0%, valuation comes out at $0.723 per share.
Updated disclosure: (again, at time of writing) XRF remains my largest position in both my personal portfolio @ 11.7% and Strawman @ 28.1%
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Appendix 1: Revenue and margin estimates
“Management also stated in the footnotes of 23 (ii) that Orbis contributed $1.9m rev and $36k PBT from 30 September 2021 to 30 June 2022, implying a very slow start of only ~$100k sales and -90k PBT for the first (December) quarter of contribution from Orbis.”
This final calculation quoted above could be marginally wrong - as noted previously, management comments where I get the first figure of $1.8m rev/$125k PBT did not exclude intercompany transactions for other segments, whereas the company accounts stating $1.9m rev/$36k PBT ‘calculated using the group’s accounting policies’ I assume would have eliminated any such transactions. Nonetheless, things almost certainly picked up somewhere in the second half in comparison to the December quarter.
Appendix 2: History and cyclicality of consumables margin
History presented for context:
In many respects, I would argue FY13 was the company’s best year operationally despite them having half the revenue I’ve estimated for next year (FY13: $22.5m; FY23E: $53.1m). Consumables segment margins reached 39.13%, this segment contributed just over 30% of total group revenue and group operating margins came in at almost 24%. I am interested both in seeing what a very good year can look like for the business, as well as mindful how quickly things deteriorated following this result.
One positive is that at least 3 of the current key management personnel (Vance Stazzonelli, Fred Grimwade and David Brown) were with XRF in 2013 and oversaw the challenging period that followed.