Consensus community valuation
$0.355
Average Intrinsic Value
19.6%
Undervalued by
Active Member Straws
#FY20 Results
Added 4 weeks ago

XRF saw flat revenue for FY20, coming in at $29.1m compared to $29m in FY19.

Net profit after tax, however, jumped 47% to $3.1m. Thanks to improved product mix and reduced costs.

Net cash improved to $2.7m with 10% growth in operating cash flows and repayment of debt.

Consumables again steal the show, with 11% more sales and an 18% lift in profit. Precious Metals saw a big margin improvement that saw its profit rise 50%.

Capital equipment sales and profit was down 113% and 7% respectively.  

Overall, a good result and in line with expectations. Great to see past investment paying off and there appears to be good momentum going into FY21.

Results detail here

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#ASX Announcements
Added 4 weeks ago

25/8/20 Annual Report to Shareholders

XRF released their FY20 results today which were pretty much in line with my expectations. Revenue was slightly weaker as Capital Equipment struggled as customers wound back capex as an initial response to Covid, but commentary from management suggests those sales have returned and the current order book is "above average levels".

Great cost controls meant earnings came in at 2.3c, right in my range of 2.2-2.4c. Consumables did the heavy lifting, driven by strong activity in the Australian mining sector. 

Some scattered thoughts digging into the annual report:

The investment thesis of incremental earnings growth on minimal capital re-investment is clearly playing out. Adjusting for the Covid benefits/one-offs, XRF added an incremental $1.05m PBT on incremental capital of $400k.

Balance sheet is pristine as $1.4m debt was paid down. Management has kept $3.6m cash in the business, remaining cash was paid out in 40% higher dividend, though commentary suggests this could outpace earnings growth over the coming years as the management said the 60% payout ratio was "conservative" given the current economic environment. 

Cashflow was brilliant once again, $3.4m FCF after adjusting for Government benefits. Capex was essentially flat, $539k up from $521k last year. I think the business can support growth without major capex for a few more years, meaning the ~8% FCF yield is sustainable in the near term.

The weakness in Capital Equipment was entirely in Australia. Both Canada (57%) and Europe (68%) grew Capital Equipment sales strongly which bodes well for future expansion into those regions and subsequent Consumables sales. Australia makes up 69% of sales so will drive headline numbers over the near term but longer term there is positive signs for international expansion.

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#ASX Announcements
Added 5 months ago

17/4/20 March 2020 Quarterly Trading Report

XRF released their 3Q report which was in line with the 1H with low single digits revenue growth and ~40% NPBT growth as margins continue to expand rapidly back to pre-investment levels. The company confirmed that the majority of their business has been operating as normal, with the majority of revenue from mining customers remaining unchanged. There has been some small impact from the international sales offices in Germany and Canada largely because employees have been forced to work from home causing delays closing sales over email and phone.

The one area that will take a hit is new Capital Equipment sales which isn't unexpected as discretionary capex will be wound back across the customer base. Short term this isn't a large concern as it is such a small contributor to profit, but can impact longer term as new sales are a lead indicator to ongoing Consumables and Precious Metals sales.

Management highlighted the strength of the balance sheet with $3.7m cash (an extra $1m since mid-Feb at the half year report) and minimal debt which is asset backed by the Melbourne factory and equipment. Speaking on a conference call after the results, the CEO highlighted the strength of the balance sheet could support M&A activity as conditions normalise.

While management was understandably reluctant to provide 4Q guidance, I wouldn't expect major hits to profits particularly as industry starts to return in key geographies (even if restrictions remain around hospitality and leisure). Given 4Q is seasonally strongest for XRF I suspect they could add another $1-1.2m in NPBT in the 4Q and do ~$3m NPAT for the full year or 10x earnings. Given the defensiveness of those earnings in the current environment that could be cheap, but market may now be looking ahead past the margin revision thesis to where the longer term growth comes from.

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#Corona Crisis
Added 6 months ago

I think it is very hard for anyone to accurately predict on a macro level how long the current downturn lasts for and the long term effects of it. What we can and should do though is look at individual businesses and assess the impacts to them from the coronavirus, positive or negative.

For XRF I recently spoke with the CEO Vance Stazzonelli who said they have yet to see any impact from the coronavirus with business remaining as usual. XRF's main clients are in mining and construction which have been deemed essential industries even in countries with full shutdowns. The company's offices in Canada and Germany are sales offices with employees able to work from home and sales closed over phone and email. This is assisted by the fact majority of sales are from existing clients.

Vance sees the big short term risk to the business being a forced closure of their Melbourne factory. If the Victorian Government did implement Stage 4 restrictions Vance hoped they could claim an exemption given their products are critical to the mining industry which would be deemed essential. 

The other point Vance stressed was how conservative the company's balance sheet was, net cash and the small debt on the balance sheet backed by the company's Melbourne land and factory. On top of this, the $9m of inventory is roughly six months worth of operations in case supply chains are disrupted with a big chunk of that being pure platinum. With no changes to business operations Vance said the company would release their planned third quarter update in mid-April and saw no need for a specific corona virus update.

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#Broker/Analyst Views
Last edited 2 months ago

21-July-2020:  CCZ Equities Research:  XRF Scientific (XRF): Niche manufacturer with global potential

CCZ has a "Buy" call on XRF and a TP (target price) of 31 cps (cents per share).

Excerpt:

  • Initiating Coverage: XRF Scientific (XRF) is a niche manufacturer and marketer of equipment, chemicals and instruments within the X-ray Fluorescence testing supply chain, an essential testing process used to determine the chemical composition of mineral assays for Australia’s resource exports. XRF’s products create samples used for testing of minerals when drilling, during production and before export.
  • Significant earnings growth that is protected from COVID-19: Strong profit growth forecast in FY20 (circa 36% statutory & 17% underlying) as demand ramps up for XRF’s flux and precious metals products. Third quarter results to March were strong with PBT up 40%, and with base metals and iron prices increasing since March, XRF will benefit from higher demand for testing services. With a dominant market position, we believe the short-term earnings trajectory remains well protected from the effects of COVID-19.
  • Precious Metals (PM) Division poised to rerate: This division deserves to trade at a material premium to the consumables and equipment divisions. Although the German office demonstrated organic revenue growth of 45% over HY20, the earnings potential of this division is not factored into the current share price. The appointment of two highly experienced sales directors to PM from a global competitor, Heraeus (a major platinum manufacturer), will support strong revenue growth as the German sales office crosses an inflection point and executes earnings growth after an extended period of capital expenditure.
  • Excess franking credits: XRF held $5.7m in excess franking credits at FY19 end, and this will increase in FY20. Management have indicated they are considering options to distribute excess franking credits back to shareholders.
  • Investment summary: We initiate coverage with a blended valuation of $0.31. With a strong trading update expected for FY20 and well protected from COVID-19, XRF’s long-term global growth opportunity and valuation makes this stock a highly attractive investment at the current share price.

--- click on link at the top for the full report ---

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#Quarterly Reports
Added 5 months ago

17-Apr-2020:  XRF Scientific March 2020 Quarterly Trading Report

Market like!  XRF were up to as high as 22 cps (+33%) earlier today, and they're still up at 19.5 cps (up 3c or +18.2%) on the back of this report.  They had peaked at 26.5c on Feb 21, then dropped -47% in 4 weeks to close at 14c on March 24.  So far, they've climbed about half way back up.

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#Bull Case
Last edited 12 months ago

XRF is a manufacturer of equipment used to measure the composition and purity of metals, materials and chemicals. Majority of revenue is mining related (58%), but this has been falling as non-mining revenue grows (generally construction materials).

The business operates with an attractive razor/razorblades model, as their low margin Capital Equipment sales feed into high margin recurring Consumables sales. For 1H19, Capital Equipment grew revenue 28%, driven by demand for new products and exited the period with a record level of orders. Consumables grew 29%, though the prior period was impacted by the integration of a Canadian acquisition. Interestingly, management are also expecting to grow their market share beyond just their own equipment.

The third operating segment is Precious Metals which is the sale and re-manufacture of platinum laboratory equipment. This segment has been significantly under-earning for the past couple of years as XRF has invested over $2.5m since FY17 expanding with a new German office and upgrading the existing Melbourne factory. This investment is largely complete as the German office is now profitable (January 2019 first profitable month of $5k) which provides an interesting inflection point for the business. Management expect "material" profit from the segment over the next 1-2 years.

With the period of heavy investment behind them, 1H19 saw strong growth in EBITDA margins from 10% to 14%, thought still well below the historical highs of 25% back in FY11. Management expect to see further margin growth in 2H19, with a goal of getting margins back to those historical highs over the next 3-5 years.

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