During August, mineral sample analysis company XRF Scientific (ASX: XRF) reported its FY 2024 results. Revenue was up 9% to $60.1 million, and net profit after tax was up 16% to $8.9 million. This indicates that revenue growth improved half-on-half, but margins were lower, with profit growth slower than the 20% rate achieved in the first half.
XRF Scientific also reports its quarterly profit before tax, and as you can see from the chart below, Q4 FY 2024 was a record quarter, with profit before tax of $3.4 million.
Yesterday, sample analysis company XRF Scientific (ASX: XRF) reported its results for H1 FY 2024, reporting revenue of $28.6 million up 6%, and net profit after tax of $4.5m, up 20%. This amounted to about 3.3 cents per share. Obviously, this was a very strong profit result, benefitting from both higher margins and a lower tax rate. My main concern as a shareholder would be that this kind of growth is unsustainable without improved revenue growth.
XRF held net cash of $5.4m, at the end of December 2023. Free cash flow was down on the prior corresponding period, at just $660k after subtracting lease repayments and capital expenditure from the operating cashflow of $2.17m. This too is less than ideal.
The company explained that the cashflow was “impacted by $1.8m in 1H24 sales that were received as customer deposits during FY23.” This effectively shifted some free cash flow from FY 2024 to FY 2023. XRF Scientific should have mentioned this at the time of the FY 2023 results. While they did nod to lower working capital requirements in that report, they should have mentioned the $1.8m received as customer deposits specifically.
The company also invested $700k into expanding production capacity in the Capital Equipment division.
XRF Scientific also reports its quarterly profit before tax, which is useful since it excludes the impact of any tax rate changes. As you can see from the chart below, Q4 FY 2024 was fairly flat on the last couple of quarters, albeit still below the record quarter in Q2.
In my coverage of the H1 FY 2024 report I said, “I will be looking for signs that quarterly profit can be maintained close to the December quarter run rate and for cash flow to improve in the full-year report.”
On those measures, this was a good result because XRF has successfully maintained profit at satisfactory levels, and free cash flow was massively improved in the second half, with the full year free cash flow coming in at around $5.7 million. This cash flow allowed the company allowed the company to reduce its debt and strongly improve its net cash position to $10.4 million.
XRF Scientific (ASX: XRF) Segment Contributions In FY 2024
The consumables decision continued to perform decently well in FY 2024, albeit at a slowing rate, with profit growth of 9% more reflective of the underlying business than the revenue growth. The revenue is impacted by the price of lithium (which is passed through to customers). However, the falling price of lithium is good for XRF because it reduces the working capital needs, boosting cashflow.
The precious metals division was basically flat on FY 2023, with Germany still the laggard. However, the full year profit result was better than the first (which was down 11%). This implies an improvement in the second half.
Finally, the capital equipment segment had a particularly good second half that benefitted from over $1m of revenue being delayed from the first half to the second half. While a stronger second half was to be expected, this segment’s result was definitely the main positive surprise for me. Either way, it is great to see that management’s positivity about this segment (evident from the half year results) came to fruition. This enhances the credibility of management, in my eyes.
XRF Scientific Valuation
Earnings per share was up 15% to 6.4 cents per share in FY 2024, giving a trailing PE ratio of 26 at the current share price of of $1.67.
The XRF Scientific Managing Director Vance Stazzonelli said that, “Including 100% of Orbis, which we now fully own effective July 2024, profit before tax for the quarter was $3.9m.” This gives us an indication that the business is capable of producing around $10m – $11m in NPAT even if it were to stop growing. Since XRF Scientific has a market capitalisation of about $234.5 million, this implies a no growth run rate P/E multiple of about 21.3.
Overall, I still think XRF Scientific remains attractively priced, but the current valuation makes me cautious about the company. I note in particular that I now feel silly for not buying shares after the slightly weaker first-half results. While I am generally cautious about cyclical businesses with volatile earnings, I continue to be impressed with the quality of management and the progress that has been made. Therefore, I continue to consider the stock a Buy, even though the stock has returned over 70% since the original Buy Recommendation was released to Supporters of A Rich Life.
Disclosure: the author Claude Walker owns shares in XRF Scientific will not trade those shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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