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XRF Scientific

ASX :

XRF

Market Cap : $97.16 Million

52 Week Range : $0.510 - $0.770

Share Price : $0.69

Dividend Per Share : $0.025

Dividend Yield : 3.49 %

Buy

A quality growth stock at the top of its niche market with proven year-on-year dividend growth.

Company Analysis

XRF Scientific (ASX: XRF) manufactures equipment and chemicals, which are distributed to production mines, construction material companies and commercial analytical laboratories in Australia and overseas. They have developed cutting-edge technology that aids their customers in improving product quality and performance, increasing productivity and yield, and reducing downtime and waste. Products developed by XRF are used in the preparation of samples for analysis.

It is a high-quality company with a high-quality product that has returned 80% and a 24.79% gain from our two recommendations in May 2021 and September 2021. XRF has consistently increased their dividends, again paying a record dividend for FY22.

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Source: Tradingview

XRF displays characteristics of a quality growth stock with high upside potential and offers a steady stream of dividends that have grown year-on-year, from 0.3 cents in 2018 to 2.5 cents for FY22. XRF’s dividends growth represents an impressive CAGR of 69.9% from FY18 to FY22.

XRF’s products are used by leading blue chips in a variety of industrial applications

XRF has manufacturing, sales and support facilities in Australia, 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 has a customer base that includes multinational blue-chip’s customers such as:

  • BHP Billiton,
  • Rio Tinto,
  • Vale,
  • South 32,
  • Glencore,
  • and Alcoa to name a few.

XRF’s technology is used to measure the composition and purity of materials and is mainly applied in industrial quality control and process control for manufacturing processes in industries such as metals and mining, construction materials, chemicals and petrochemicals.

XRF’s products play a key role in improving its customers’ product quality and performance, increasing productivity and yield while reducing downtime and waste. What we like about the Company is that it has established positions in each of its specialised markets.

The Company has developed two distinct lines of products, the Sample Preparation Products and the Precious Metals Products:

Sample Preparation Products, XRF consumable business

XRF Scientific provides technology for sample preparation in the fields of XRF and ICP analysis. XRF analysis stands for X-ray fluorescence analysis. It is a non-destructive analytical technique used to determine the elemental composition of materials. XRF analysers determine the chemistry of a sample by measuring the fluorescent or the X-ray emitted from a sample when it is stimulated by a primary X-ray source. Each element in a sample produces a set of characteristic fluorescent X-rays, similar to a fingerprint, a unique signature for that specific element. Therefore, XRF spectroscopy is an excellent qualitative and quantitative material composition analysis technology. Generally, an XRF laboratory workflow consists of these eight steps:

  1. Samples are generated through drilling at a mine or from a production plant.
  2. The samples are crushed and pulverised into fine dust.
  3. Samples, which are typically 1gm, are weighed accurately into an XRF Scientific platinum crucible.
  4. The XRF Scientific flux reagent, generally 10gm, is weighed and put into the platinum crucible.
  5. The sample and flux are fused together at high temperatures using an XRF Scientific electric or gas fusion machine.
  6. The machine automatically pours the molten mixture into an XRF Scientific platinum mould.
  7. The machine cools and sets the mixture into a glass disc.
  8. The glass disc is put inside an XRF spectrometer and analysed for its chemical content.

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Source: XRF

Precious Metal Products

XRF also manufactures products for laboratories, such as dishes and fusion labware. The Company also develops semi-finished products for its industrial customers, including sheets, foils, wires, rods and tubes. XRF specialises in manufacturing products with Platinum. Thus, Platinum’s high melting point, chemical inertness and workability during manufacturing make this material an ideal choice for many applications.

XRF also provides “tailor-made” products for unique applications. Thus, the Company has dedicated engineering and production teams that work to solve individual customer problems and provide customised platinum components. Many 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.

Source: XRF

Company Updates

FY22: Another record year for XRF with total revenue exceeding $40 million

This year once again, XRF has received a record financial result with strong contributions from all its business operations.

We have been delighted by the Company’s strong revenue, which for the first time exceeded $40 million. This demonstrates XRF’s impressive growth momentum over the prior year. We have also been pleased to witness that the Company has increased its Net Profit After Tax thanks to higher sales. The increases in sales clearly reflect XRF’s growing customer demand and prices, along with improved margins. The Company has been particularly diligent with its active cost management and continuous productivity improvements.

XRF’s approach toward customers’ attention seems to pay off. Thus, the Company’s ongoing focus on customer service, product quality, innovation and capital investment continues to drive XRF’s strong operating performance and improved financial returns.

Demand is growing rapidly for XRF’s consumable products

XRF’s Consumables business had a successful year with strong customer demand from the rapid increasing lithium input price. During the year, XRF also saw its sales volumes grow due to its high product quality and excellent customer service. The Company reported profit margin improvement despite the volatile and increasing lithium market price. XRF continues to develop new products and innovative production processes to further consolidate its business’s position as a global market leader.

XRF’s Precious Metals fabrication business stayed on track for further sales growth

XRF’s Precious Metals fabrication business maintained its strong growth in sales and profit and continues to broaden its range of products manufactured in the Company’s Melbourne plant. The Company’s custom manufacturing business keeps attracting new customers, which supplies specialised products to a global client base. In FY22, we have seen XRF’s German operation double its profit and increase its market penetration while growing its repeat business. XRF’s customers seem to appreciate the Company’s reliable service and product quality.

COVID negatively impacted profits of XRF’s Capital Equipment business, although sales continued to grow

The Company’s Capital Equipment business has seen increased sales during the period. However, profit was impacted by continuing COVID-related issues. On a positive note, XRF has managed to maintain its forward order book at record levels. Thus, XRF’s 50% acquisition of Orbis Mining is already contributing benefits, and we believe sales of Orbis’ industry-leading crushers are expected to become a significant driver of XRF’s future growth.

XRF’s new products development and strong financial performance to support long-term growth

Onward FY23, XRF expects to introduce a new product to an attractive adjacent market sector which will complement the Company’s product range and benefit from its existing sales network and reputation for quality, reliability and service support. Furthermore, XRF’s continuing strong financial performance has again allowed the Company to increase its fully franked dividends paid to its shareholders while maintaining a very strong balance sheet.

We believe all of XRF’s businesses enjoy favourable market conditions and are well placed to deliver ongoing growth and improved shareholder returns. XRF intends to support its long-term expansion via acquisition opportunities in adjacent sectors that will be value accretive.

Investment Thesis

FY22 results: Solid performance and growth across XRF’s business segments

  • Sales Revenue up 28% to $40 million from $31.3 million
  • Net Profit After Tax up 19% to $6.1 million from $5.1 million
  • Adjusted Profit Before Tax, up 38% to $8.2 million from $5.9 million
  • Final fully franked dividend of 2.5 cents per share

XRF is working towards diversifying its revenue stream

FY22 was a very strong year with a record profit before tax of $8.2 million. All the Company’s divisions contributed to this amazing result, with a high level of activity occurring in the mining sector and growth in international sales. We continued to see the Company keeps diversifying its revenue base and increasing non-mining revenue, including the growth of its Precious Metals division’s industrial platinum products.

The high level of activity in the mining sector contributed to the surge in XRF consumables sales

XRF’s Consumables division had an excellent year, generating a profit before tax of $4.1 million from high activity levels in the mining sector. Lithium chemicals are a key production input and have been increasing in price due to demand from the EV sector. As a result, revenue and costs are expected to continue to rise in FY23, with no negative impact on margins.

  • FY22 Consumables: revenue is up 30% year-on-year.
  • FY22 Consumables: Net Profit Before Tax is up 42% year-on-year.
  • The Robust demand from the mining sector is driven by production and exploration.
  • Key production input lithium compounds rose in price due to demand from the EV sector and added $2.4 million to the Company’s inventories. The revenue and costs increased, with no negative impact on margins. The situation is expected to continue in FY23.
  • Inventory levels are expected to rise by a further $2.3 to 2.8 million during FY23’s first half. Additional working capital requirements for lithium should level off by around December 2022.

The recent 50% Orbis Mining acquisition is expected to be XRF’s key revenue driver onward FY23

The Capital Equipment division delivered a profit before tax of $1.1 million from revenue of $10.8 million. The demand for capital equipment was robust throughout FY22, with customers acquiring new machines across mining and industrial sectors such as cement and steel manufacturing. Consequently, XRF’s order book continues to reach new record levels, with production for some product lines booked out for the first half of FY23. XRF’s 50% acquisition of Orbis Mining has been fully consolidated into the Company’s accounts and is now part of the Capital Equipment division. The business is performing well and is generating a revenue of $1.8 million during the second half of FY22. The new product line has good forward sales momentum, and we expect XRF to achieve significant revenue growth during FY23. Thus, many sales are occurring within the gold industry to support the crushing of samples for photon and fire assay.

  • Capital Equipment division: revenue is up 12% year-on-year.
  • Capital Equipment division: Adjusted Net Profit Before Tax is up 3% year-on-year. (ex COVID-19 subs)
  • XRF has experienced high levels of machine demand from the mining and industrial sectors. Growing installed machine base is increasing spare parts revenue over time.
  • XRF’s Order book continues to grow to new record levels, with some product lines booked out for production for FY23’s first half.
  • 50% acquisition of Orbis Mining contributes to laboratory crusher revenue of $1.8 million during FY22’s second half. Significant revenue growth is expected for FY23 based on current sales momentum.

XRF’s Precious Metals division continues to grow its customer base in Europe

The Company’s Precious Metals business delivered during FY22 a steady revenue of $18.3 million, which contributed to a profit before tax of $2.8 million. XRF continues to expand its base of industrial product customers in Europe, most of which are expected to generate recurring revenue. XRF acquired new customers in specialised fields, including platinum products, to produce medical glass and crystal growth. The Company has reported good levels of reoccurring orders from mining customers, as increased sample testing requires regular recycling of spent platinum labware products.

  • Precious Metals division: revenue is up 28% year-on-year.
  • Precious Metals division: Net Profit Before Tax is up 13% year-on-year.
  • Adjusted Net Profit Before Tax is up 33% year-on-year. (ex COVID-19 subs)
  • XRF is experiencing strong demand from mining and industrial markets for its new product and recycling sales.
  • XRF also saw its reoccurring orders increase from mining customers, as more sample testing requires regular recycling of spent platinum labware products.
  • XRF acquired new customers in specialised fields
  • XRF’s Germany office contributed revenue of $5.5 million (FY21: $3.6m) and a Net Profit Before Tax of $453k (FY21: $199k)

Source: XRF

Another year of dividend growth for XRF

The Company has generated a record full-year result with an impressive revenue of $40 million, representing a 27.8% increase year-on-year. Consequently, XRF saw its Net Profit After Tax improve by 19% year-on-year to $6.1 million. During FY22, we have seen strong activity levels in the mining industry across exploration and production. There was robust demand in Australia and across XRF’s key markets globally. There was significant sales growth in Europe, North America and Asia. The second half was notably stronger, with $4.5 million in adjusted profit before tax delivered, compared to $3.7 million in FY22’s first half. This is in line with increased levels of activity from the mining sector, sales growth internationally and the progressive return to normal post-COVID.

With another exceptional year with strong earnings, dividends growth was again at the rendezvous. Thus, the Company’s Board declared a final fully franked dividend of 2.5 cents per share, up by 25% from FY21. This represents a payout ratio of 56% of the net profit after tax.

XRF provides a dividend reinvestment plan, which is available for shareholders by registering participation at the share registry, Automic Group. A 2.5% discount will apply to the Dividend Reinvestment Plan.

XRF’s ex-dividend date for its final dividend will be on the 29th of October 2022, with a record date on the 30th of October 2022. The payment date will be on the 14th of September, 2022.

FY23 Outlook: XRF is aggressively expanding in every direction

XRF’s Consumables division substantially contributed to FY22’s strong earnings, generating a profit before tax of $4.1 million from revenue of $12.1 million. We see the mining sector continuing to generate healthy activity levels onward FY23, with long wait times for sample results being reported by laboratories. We believe profits increased will likely be due to higher production volumes and additional margin earned on previously ordered low-cost raw materials that were part of XRF’s large inventory position.

XRF is developing a new consumable product line, which could bring a new revenue stream to the Company

XRF continues with new consumable product developments and is planning the launch of a new product line within the first half of FY23. Lithium chemicals are a key production input and increase in price during the year due to demand from the EV sector. As a result of the price increases, the Company’s inventory balance in the division grew by $2.4 million during the year. We anticipate a further increase in the first half of FY23 in the range of $2.3 to 2.8 million, as older stock is replaced with new material at higher prices. Accordingly, XRF has informed that the Company expects additional working capital requirements for lithium should level off by around December 2022.

The 50% acquisition of Orbis should level up the Company’s revenue from its Capital Equipment division

In October 2021, the Company acquired 50% of Orbis Mining shares, purchasing $600,000 in cash and $200,000 in XRF shares. XRF also initially loaned $500,000 of working capital to Orbis Mining. The business performed well and generated revenue of $1.8 million and profit before tax of $125k during the second half of FY22. In addition, $0.4 million in sales were delayed until FY23 due to wait times for receiving final assembly parts from suppliers. We are convinced that the new product line has good forward sales momentum, and we expect significant revenue growth during FY23.

FY22’s demand for capital equipment was robust, and XRF saw its customers acquiring new machines across the mining and industrial sectors. The Company’s order book continues to reach new record levels, with production for some product lines booked out for the first half of FY23. We think the strong demand will likely continue onward FY23, driven by the global mining sector and industrial customers outside Australia.

Three reasons why we think XRF is a strong buy

  1. XRF’s proven year-on-year dividend growth. XRF’s dividend growth represents an impressive CAGR of 69.9% from FY18 to FY22. We believe this trend will continue in FY23 as the Company is expanding its product line, leading to increased revenue and earnings.
  2. XRF’s future expansion with a few M&A opportunities in the pipeline: The Company is intended to target complementary manufacturing companies in the laboratory supply and precious metals sectors.
  3. XRF’s consumables recurring revenue: The Company acquired new customers in specialised fields, including platinum products, to produce medical glass and crystal growth. We have seen good levels of reoccurring orders from mining customers, as increased sample testing requires regular recycling of spent platinum labware products.

Recommendation

We recommended XRF twice last year. It is not only a quality growth stock but also a stock that offers a good income stream that will likely grow over the upcoming years. The Company is offering a reasonable 3.49% annual yield at the current price.

Overall, XRF is at the top of its niche market. Over the past few years, we have seen the Company grow rapidly. Its margins have also expanded, and XRF is aggressively gaining market share in the industry. The positive momentum is expected to continue onward FY23 with a healthy dividend in addition to the already solid growth profile. We continue to recommend long-term investors to “Buy”.

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