- Tox Free expands via Waste Solutions acquisition - Purchase offers entry into Northern Territory Market - Deal earnings accretive, forecasts lifted - DJ Carmichael rates Tox Free as Buy

By Chris Shaw

Industrial and hazardous waste management company Tox Free Solutions ((TOX)) recently announced the acquisition of Waste Solutions Pty Ltd, a Darwin-based waste management group. The deal values Waste Solutions at $18 million and is expected to be earnings accretive for Tox Free from year one.

The Waste Solutions acquisition also makes strategic sense, comments stockbroker DJ Carmichael, as it provides Tox Free with a foothold in the Northern Territory market. This should assist with the expansion of Tox Free's industrial services operations in that region.

This is important for offering future organic growth potential for Tox Free, as DJ Carmichael notes there are a significant number of current and planned onshore and offshore resources projects in the region. Growth is also expected to come from the introduction of additional services going forward.

The Waste Solutions acquisition also benefits Tox Free by allowing for waste to be treated at the company's own facilities. Previously, this operation was outsourced, so DJ Carmichael sees the move to in house treatment as offering a boost to margins.

To reflect the Waste Solutions acquisition, DJ Carmichael has lifted earnings forecasts for Tox Free, with earnings per share (EPS) forecasts for FY12 increasing to 17.2c from 15.8c previously. FY11 EPS is forecast at 12.8c.

DJ Carmichael's forecasts compare to consensus EPS estimates according to the FNArena database of 12.9c for FY11 and 18.3c for FY12. On the back of its revised earnings estimates DJ Carmichael's price target for Tox Free increases slightly to $2.59, while the consensus price target according to the database stands at $2.49.

The combination of a solid balance sheet, above average margins, a strong growth outlook and the company operating in a niche market leaves Tox Free deserving of a premium multiple in the view of DJ Carmichael. Given an estimated FY12 earnings multiple of 12.8 times at present this is not being priced into the stock, so the broker rates Tox Free as a Buy.

RBS Australia and UBS agree and also rate Tox Free as a Buy, RBS having upgraded from Hold on news of the Waste Solutions acquisition. The upgrade reflects both positive long-term fundamentals and improved value on offer following recent share price weakness.

JP Morgan is the other broker in the FNArena database covering Tox Free but rates the stock as Neutral. This is a valuation call, as JP Morgan also sees earnings upside from the acquisition and potential for Waste Solutions to open up new industrial services opportunities for Tox Free.

Shares in Tox Free today are slightly lower and as at 11.25am the stock was down 3c at $2.22. Over the past year the shares have traded in a range of $1.955 to $2.52. The current share price implies upside to the consensus price target according to the FNArena database of around 11%.

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