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Date : 31/05/2021

XRF Scientific

ASX :

XRF

Market Cap : $53.15 Million

Dividend Per Share : $0.014

Dividend Yield : 3.54 %

Buy

52 Week Range : $0.190 - $0.395

Share Price : $0.395

A high performing company that will benefit from the mining boom. Growth, dividends, and a 'Buy' from us.

Company Analysis

XRF Scientific Limited (ASX: XRF) manufactures and markets precious metal products, specialized chemicals, and instruments for the scientific, analytical, construction material, and mining industries in Australia, Canada, and Europe. It operates through Capital Equipment, Precious Metals, and Consumables segments. The Capital Equipment segment designs, manufactures, and services automated fusion equipment, and high temperature test and production furnaces, as well as general laboratory equipment. The Precious Metals segment manufactures products for the laboratory and platinum alloy markets. The Consumables segment produces and distributes consumables, chemicals, and other supplies for analytical laboratories.

XRF has manufacturing, sales and support facilities located in Perth, Melbourne, Europe, and Canada, plus a global network of distributors. The Company has representation in the United States, South America, Africa, the Middle East, and Asia. XRF’s technology is used to measure the composition and purity of materials and is mainly applied in industrial quality control and in process control for manufacturing processes in industries such as metals and mining, construction materials, chemicals, and petrochemicals. XRF’s products help customers to improve product quality and performance, increase productivity and yield and reduce downtime and waste. Its businesses have established positions in their specialised markets.

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XRF’s technology is cutting edge. XRF Scientific provides technology for sample preparation in the fields of XRF and ICP analysis. Their process begins with samples being generated through drilling at a mine (iron ore, base metals) or from a production plant (cement, steel etc.). These samples are then crushed and pulverised into a fine dust and weighed accurately into an XRF Scientific platinum crucible. The XRF Scientific flux reagent is later weighed and then put into the platinum crucible. The sample and flux are fused together at high temperatures using an XRF Scientific electric or gas fusion machine where the machine automatically pours the molten mixture into an XRF Scientific platinum mould. The machine then cools and sets the mixture into a glass disc, which is then put inside an XRF spectrometer and analysed for its chemical content.

Platinum’s high melting point, chemical inertness and workability during manufacturing make it an ideal choice across a number of different applications. XRF manufactures products for laboratories such as dishes and fusion labware. For industrial customers, they manufacture semi-finished products including sheets, foils, wires, rods, and tubes. For unique applications, XRF’s engineering and production teams work to solve individual customer problems and provide customised platinum components. Many of these platinum components are used in manufacturing processes such as the production of glasses or crystal growing for electronics. Smaller platinum components often form part of the assembly of a larger product such as an analytical measurement instrument. This is the precious metals business of XRF, and it accounts for over 43% of their total revenues. One of the strengths of XRF is their diversified revenues that ensures that they are not really reliant too much on any of the 3 segments that they operate across.

Geographically, Australia is their largest market by revenue. The Canadian market has rather flattened recently, however, Europe is where a lot of the growth for the company is coming from. XRF is also known to be pushing its presence in the continent as it is a gateway to a large industrial market. Recent announcements and updates by the firm does emphasise on the firm growing their market share across regions in Europe, such as Germany.

Company Updates

The last 12 months of Insider share purchases should give investors’ confidence in XRF. Insider buying is generally a good signal, and it shows how positive insiders feel about the company. Theoretically, when insiders buy shares, less of them are available to the public. It means that in the event of investing public meets decreasing available stocks supply with increasing demand, share price will ultimately rise. In fact, recently, Non-Executive Director David Brown bought an additional $72,000 worth of XRF stocks at 36 cents per share. While it is not a significant purchase, it nonetheless increases the shareholding by about 2%. Earlier in FY20, David Brown made a larger buying of $90,000 worth of XRF stocks at a price of 30 cents per share. It has been reported that insiders bought shares during FY20, yet they did not sell any. This gives us confidence and provides us a clue on insiders’ consideration of XRF shares to be undervalued. As of today, insiders own about 27% of the company valued at A$ 14 million. The high 27% ownership aligns management interests along with that of the shareholders.

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Source: Tradingview.com

XRF has been in the business for an extended period. The company first commercialised its XRF flux production back in 1972 and has been in continuous successful development and commercialisation since then. It has been quite recently that XRF was introduced to the stock market in late 2006. Since its Initial Public Offering, the company’s shares appreciated by more than 94% and navigated graciously through major crises such as the 2008 global financial meltdown and the recent COVID-19 outbreak. This shows us that XRF has a proven business operation and is a resilient company.

XRF shares have been performing magnificently since the crash in March 2020. Their performances have been positive, and the share price has had more than a decent run. April 2021 saw quite a few catalysts for the massive surge that can be seen in the chart above.

The quarterly performance report for the period ending 31st March 2021 sent the stock skyrocketing. All three of their divisions had performed and contributed well to their overall result. The mining industry has really bombed recently with sky-high commodity prices and this has really lifted the uptake for XRF’s products. The increased demand has been across the world, and not just in Australia. XRF’s offices in Europe and North America have witnessed increased demand during this period and also when these regions as a whole began recovering from the pandemic.

Expansion Opportunity

XRF is well-established internationally with offices in Canada, Belgium, and Germany. Furthermore, XRF is rapidly expanding in Europe. The company plays an important role in the industrial and mining industry by providing technology to measure the composition and purity of materials. XRF products are crucial for its industrial and mining partners for the quality control and the in-process control in the manufacturing process of metals, mining, construction materials, chemicals, and petrochemicals. XRF is leading a market that is extremely specialised and is becoming indispensable for the industrial and mining sector.

Despite the current global challenges from COVID-19, XRF continues to deliver substantial improvement in its financial performance. The company managed to maintain its revenue during FY20 at the same level as during FY19. XRF has shown its strong ability to efficiently handle its operating expenses and improve its cost management. During the period, XRF has also witnessed good customer demand and an increased market penetration. We believe XRF is well-positioned to capture the rebound post-COVID as attested by the strong operating performance that the company exhibited during this time of uncertainty. The global mining market is projected to grow from $2,121 billion in 2020 to $2,384 billion by the end of 2021. The growth in the mining sector is the result of the adaptation of mining companies to respond to rearranging necessities of their operations during the COVID-19 impact. The reorganisation led to streamlined and more efficient operations, hence we can expect the market to reach $3,140 billion in 2025 at a CAGR of 7%.

Investment Thesis

For the six months ended December 31, 2020, XRF revenues decreased by 5% to A$ 15million. Net income increased by 47% to $2.4 million while revenues reflect Precious Metals segment which decreased by 14% to $6 million. Consumables segment revenue decreased by 13% to $4.2 million. Net income reflects the decrease in administration expenses by 5% to $3.4 million. The decline in revenue was affected by the Canadian segment that accounts for a revenue decrease of 40% to $7.1 million and Europe which went down as well by 4% to $3.4 million. All of this, however, was expected given the disruption the pandemic has caused in the mining sector, especially in Europe and North America.

Performance in the latest quarter, however, has shown a rebound. Sales across all segments and regions are back up, and demand is growing stronger. Consumable product sales have been very strong, as mining customers ramp up sample testing for production and exploration. Sales were $2.67m, which was a 32% increase on the December 2020 quarter. Sales of capital equipment products have been robust, with high levels of demand occurring in Australia, Europe, and North America. The order book for some products remains at around two months, with demand driven primarily by mining customers. There has also been a steady flow of orders from industrial customers.

Precious metals sales have been strong, receiving a benefit from new platinum labware being bundled with capital equipment products. A good level of platinum labware remanufacturing orders were seen as a result of increased sample testing by customers. The Germany office continued to expand market share and was profitable for all of the March quarter. The office delivered revenue of $955k during the March 2021 quarter compared to $649k in the December 2020 quarter. There has been a positive acceptance of the firm’s platinum products into the large industrial markets being targeted in Europe. All great signs for the business.

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Source: XRF

These factors have really underpinned the strong quarterly result that XRF announced. Revenues increased by 20% over the March 2020 quarter, a time when the pandemic’s effects were not felt in most parts of the world. The increase in profitability of over 80% is a massive boost to the company and shareholders given XRF’s fairly high dividend policy.

COVID-19 brought a lot of challenges for businesses around the world, particularly during the first half of 2020 and it has not been an exception for XRF. However, the company has shown its capabilities to navigate through troubled water and its financial and operating performance remained strong throughout FY20. With a strong balance sheet of $2.6 million in cash and only $0.9 million in debt as of FY20, we believe XRF has a robust foundation to further grow its business. The total assets come in at $45 million, while their total liabilities are $9 million. Assets outweigh their liabilities by 5x.

Revenue is on the rise; the group has reported $29.09 million in FY20. We expect revenue to reach $44.89 million at a CAGR of 9% by FY26 based on current trajectory. The gross profit margin has been stable over the last 3-year period and is expected to remain stable at 43%. On the other hand, net profit margin is improving year-over-year which is quite impressive. XRF assets are growing by +8% during FY20 and by +30% since FY17. In Spite of the rapid growth trajectory of the company, its capital structure remains conservative with liabilities accounting only for 10.5% of the mix.

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Growth remains modest; however, the narrative is that, even during modest growth, XRF’s revenues and EBITDA estimates are a linear curve. This is a highly sought after property across these metrics that companies envy.

XRF has a policy to pay one dividend per year on operating profits which will be determined based on the full-year result. Over the past 3 years, we have seen their payout ratio go from 18% to 42% of NPAT. Given that 2021 full year performance is rather flat and similar to FY2020, and with improving operating conditions, XRF is expected to continue paying a similar dividend of $0.014 a share later this year. While there is no set-in-stone policy that XRF has laid out on dividends, their recent history of payment suggests that there is upside in the dividend department, along with share price appreciation driven by the growth of the firm.

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XRF has been bullish since the beginning of 2020 and has even surpassed its pre-COVID-19 share price by +40%, reflecting the company’s robust fundamentals. Looking at XRF multiples, we can presume that it is fairly valued with an estimated EV/EBITDA of 8 times for FY21. We believe XRF can grow further as supported by our forecast with an increasing net profit margin of 10.2% CAGR for the next 5-year period. XRF also exhibits a stable gross profit margin at 43% which gives us strong confidence in the company. Furthermore, we expect XRF return on equity to average 7.4% over the next 5-year which is in line with the average mining sector’s ROE of 5% to 9%.

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Technical Analysis

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Trend

XRF did not take that long to recover from the global market sell-off  to its pre-COVID-19. For the majority of the second half of 2020, XRF traded in range with its pre-COVID high at A$ 28 cents per share as its key support level. XRF attempted several times to cross above A$ 34 cents without success, until recently. On the 15th of April 2021, a surge in volume pushed the stock price all the way up near its all-time high at A$ 40 cents per share. XRF appreciated by 41% in just a few days, hence we suggest to remain cautious as the stock might be temporarily overbought.

Key price levels

The key support level to monitor is the A$ 34 cents per share which is a confluence zone. The strong volume surge confirms that market participants are taking position and driving the price up. This level is also the 50% retracement from the latest breakout that started from the Pre-COVID level of A$ 28 cents per share. With all these criteria aligned, we believe that a correction back to the key support level of A$ 34 cents may occur before attempting to break the all-time high at A$ 40 cents per share.

Volume and momentum

Volume decreases since the last 200-day with the 20-day volume average down by -15.5%. The price action remains bullish in the near-term, evolving in a range between A$ 34 cents and 40 cents per share.

Trade consideration

  • Market participants might be interested to enter at key support level: A$ 35.5 cents and A$ 34 cents.
  • Primary target price above $A 50 cents per share
  • Secondary target price at $A 1.0 per share
  • Consider reducing exposure below A$ 32 cents
  • It is recommended exiting the trade below A$ 31 cents

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Recommendation

We are issuing a “Buy” recommendation on XRF. XRF develops products that are crucial for the industrial and the mining sector. It is leading a niche market and is becoming indispensable for its growing customer base. XRF is well-positioned to capture the rebound post-COVID as demonstrated by the strong operating performance. The global mining market is projected to expand at a CAGR of 7% by 2025 and this adds a lot of tailwinds to XRF. In addition to the projected growth, the dividends add further upside potential to investors.

 

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