Description
All values in Australian dollars, unless otherwise stated
Based in Perth, Australia and public in Australia since 2006, XRF Scientific (ASX: XRF) has a precision lab equipment business. The company arguably has one of the best and broadest global offerings of flux equipment and fusion flux chemicals for XRF analysis.
The company caught our attention due to its steady growth in earnings (and dividends) and reasonable valuation at 14.5x TTM EPS.
PRECISION LAB EQUIPMENT FOR SAMPLES FOR XRF ANALYSIS
XRF Scientific is a manufacturer of precision lab equipment and specialty chemicals for preparation of samples for XRF analysis. Customers are in mining, in construction, in materials and commercial and industrial labs.
As background, XRF, or X-ray Fluorescence, is an analytical technique to evaluate the chemical purity and composition of materials. A sample is often crushed to fine dust by a Lab Crusher. A sample may also be dried by a Lab Drying Oven. The sample and flux are weighed and prepared as a mixture. That mixture is placed into a crucible and fused together at 1000+ degrees Celsius in a fusion furnace. The mixture is then poured into a platinum mold. The final result is a cooled, glass disc, which can be inserted into the XRF spectrometer for analysis.
XRF’s founding director David Brown is a pioneer in XRF flux production with a career R&D history that dates back to 1972. XRF sells equipment and specialty chemicals for several stages of the sample preparation. They offer products for sample preparation (i.e. Lab Crushers, Lab Drying Ovens), products for lithium borate fusion (Fusion Machines, chemical reagents), and products for XRF Spectrometers (e.g. Drift monitors for x-ray tube monitoring, fused calibration beads for the calibration of an XRF spectrometer).
Product categories include:
Lab Equipment: Lab Crusher (e.g. preparation of mining samples), Drying ovens, etc.
Fusion Equipment: several models of electric fusion machines for preparation of samples (e.g. with lithium borate flux); gas fusion machines
Flux & Chemicals: Fusion Flux, etc.
Platinum Labware: Fusion and General Labware
Precision Platinum: specialized platinum components
Here’s recent revenue by segment (FY21 ending June):
Capital Equipment: $9.6 M sales, $1.5 M EBIT
Precious Metals: $14.4 M sales, $2.5 M EBIT
Consumables: $9.3 M sales, $2.9 M EBIT
Total: $31.3 M sales, $5.9 M EBIT
MANAGEMENT: DECENT INSIDER OWNERSHIP AND SOLID CORPORATE GOVERNANCE
For a microcap, the company appears to have strong corporate governance. XRF shares its detailed corporate governance plan online, which includes its eight principles (and many sub-principles), board skills matrix, tracking of meetings of directors, responsibilities of the board, code of conduct, shareholder communications strategy, continuous disclosure policy, risk management policy, securities trading policy, anti-fraud policy, and equal opportunity policy.
The share count has little creep, growing from 133 M five years ago to 135 M recently.
Insider ownership is nearly 10%:
Chairman Fred Grimwade 0.5 M shares
Director David Brown owns 9.6 M shares
Director David Kiggins, 0.2 M shares
Managing Director Vance Stazzonelli, 0.6 M shares
Also, Michael Karl Korber, a Managing Director of Perpetual ASX: PPT, owns 11.2 M shares, about 8.3%.
VALUATION
XRF caught our attention due to its steady growth in earnings (and dividends) and reasonable valuation at 14.5x TTM EPS of $0.038.
For last two years, XRF has average depreciation of $1.1 M, average capex of $500K. XRF has a net cash position: cash of $5.3 M and short-term debt of only $824K.
FY June 2016-17 2017-18 2018-19 2019-20 2020-21
EBIT: $982K $1.6 M $3.2 M $4.6 M $6.8 M
EPS: 0.6 0.8 1.6 2.3 3.8
DPS: 0.24 0.3 1.0 1.4 2.0
Impressive, steady growth in EBIT, EPS and DPS since 2017! The dividend payout ratio has been 60% recently.
CATALYST: RECENT, SMALL ACQUISITION
Recently, XRF acquired 50% of Orbis Mining Pty. Orbis had F21 sales of $2.3 M and profit before tax of $0.34 M. Orbis makes lab jaw crushers, primarily for mining sector. Orbis has a patented component that allows for sample sizes of up to 110 mm to be crushed to 2 mm in a single pass. Orbis was founded in 2014 and based in Mandurah, Australia. Seems like this acquisition could be a nice complementary fit to the company’s product roadmap and team.
CATALYST: CONTINUED GEOGRAPHIC EXPANSION
XRF opened a Canadian office in 2013, a Belgium office (via acquisition of Socachim SPRL) in 2015, and a German office in 2016 (which became profitable in 2021). Significant sales growth and enhanced profits should continue in those countries.
In last fiscal year, Australia is 62% of sales, Canada is 11.5%, and Europe is 26.5%. The current dominance of Australian sales implies a large growth opportunity in Canada, Europe, and elsewhere.
RISKS
Has significant exposure to Australia and mining.
Leading manufacturers of XRF spectrometers, like Thermo Fisher Scientific (NYSE: TMO) and Bruker (NASDAQ: BRKR), could get more aggressive in this market segment.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Continued growth in EPS and DPS
Trades at low multiple of TTM EPS
Recent small acquisition
Continued geographic expansion
Acquisition candidate (accretive to several much-larger instrumentation companies)