ESS - Essa

[Lizard]

Carrying on with my reviews of "cheap" Aussie small caps coming into reporting season...

Background

Essa Australia is a small company specialising in the manufacture of laboratory equipment for the sampling and testing of minerals. Initially two separate business, Essa and Labtechnics (formed 1980Õs), the two companies merged in 1996 to form Labtech Essa. The business listed on the ASX in October 2004, raising $5m through the issue of shares at 25cps. Listing was undertaken primarily to enable the company to seek faster organic growth and acquisition activities. The vendor retained 55% of shares on issue Ð since reduced slightly.

The business can be divided into Òstandard equipmentÓ, Òwear and spare partsÓ, Òsampling equipmentÓ and Òlab automationÓ. With the exploration boom pushing mineral testing laboratories to run at maximum capacity, the demand for these products should be high. Looking forward, the main thrust of organic growth is in the supply of higher margin, automated and robotic equipment. The company has also expanded geographically in recent years, with offices in South Africa, Europe and Chile. The company web-site www.labtechessa.com provides an excellent source of information including Patersons reports (Patersons having been lead broker for the issue).

Current Status

Labtech Essa reports having been profitable for every year of the last ten years. From available data, it appears that profits have also grown in every year from at least 2001. The 2005 NPAT of $1.87m came in ahead of prospectus forecast ($1.75m), putting the company on a P/E of 8.2 at the current share price of 35cps. Dividends of 2.6cps were paid, giving a yield of 7.4% plus franking credits. Revenue grew by 38% - a rate that appears somewhat higher than the five year average growth rate of 16%.

However, in the first quarter of 2006, the company experienced some operational hiccups that impacted on profit and resulted in a profit downgrade. Despite this, a recovery was made in the second quarter and half year profit of $0.72m was reported. Currently Essa are forecasting full year revenue to grow slightly to $17.8m, with NPAT falling slightly to $1.65m (largely, it appears, due to higher than normal tax payment). Dividends are forecast to fall only slightly to total 2.50cps (half of which was paid at HY). Achieving these results suggests a forward P/E of 9.3 and yield of 7.1% - cheap for a company with a 10 year profit history, at least 5 years of double-digit growth and with net cash of $1m.

Long Term Prospects

The current resource exploration boom should be beneficial to Essa, particularly given the reported squeeze on laboratories. This should be leading to a period of laboratory upgrades and, combined with skilled labour shortage, automated systems should be high on the cards. In fact, Essa is forecasting growth of 160% in sales of automated equipment for the 2006-2007 year Ð up from 32% in the current period. Unfortunately, it is not clear what base this off, although it has been mentioned that automation projects typically fall in the range $0.5-$2.0m project value.

Around 25% of revenue is generated from sales of replacement parts which provides some underlying consistency to the business growth.

Summary

Essa appears to provide low risk leverage to the resource boom. The shares currently appear undervalued and show prospects for good growth and yield. Based on a continuation of recent growth rates over the next 5 years, a valuation of 64cps seems appropriate. From a sentiment perspective, I would expect the achievement of full year forecast would move the price to around 45cps, with possible upside if the forecast result is exceeded.

[Lizard]

Transferred from other thread...

Results just out. NPAT $1.8m, P/E 8.5, net yield 7.1% (at share price of 35cps). Predicting further growth for coming year. I have increased valuation to 68cps.

[Lizard]

quote:Originally posted by Mick100


Thanks lizard
bought in recently at 35.5c
I like the yield and the growth potential
.

Hi Mick. Glad to have some company on one of my obscure picks. 3:30pm on a Friday afternoon might not have been the ideal time to release a good result... still, hope we see a bit of a re-rate on Monday - failing that, the agm might get some more response.

[Lizard]

quote:Originally posted by davidrob

Essa (ESS)

Interesting play here guys,

errr,

but isn't NPAT, ebit,(eps --Year on Year comparo from 2005)-- and ebita.... for ESS, sorta, Down about 15% for the year ?? [?]

Regards,

Robbo

Hi Robbo. Just putting my reply on this thread cos I like this thread better due to earlier analysis...

Yes, been thinking about that one too. Definitely needs a watchful eye on the EBITDA margins. Historic data from 2001-2004 indicates they were in the 22-24% range. Last year down to 19%, then first half 2006 down to 12.6%, with recovery to 17.4% in second half.

They acknowledged cost pressures in the first half - as with many businesses - and put in place plans to address. Part of the margin change may also be in the product mix. Alot of the revenue increase seems to be coming from the sampling consumables at the moment. Next year they were indicating an expectation of a 160% increase in the automated laboratory equipment, for which the margins are at the higher end.

So agree that the margins need watching, but still some safety in the valuation and sales growth prospects.

Cheers,
Liz

[robbo]

Essa (ESS)

Yep, good points Lizzard, very good points.

It may get down to whether the market will accord ESS a Future earnings rating at this early stage...

Which means, to "buy & believe into the co's (ESS) tentative forward EBITA and NPAT projections for 2007 & 2008.

Or instead, whether the market, will sit back, be stubborn and make the judgement not to re rate, not on the currently available Historical and present earnings.....But only when the Actuals are posted later on.....

For those who Hold --(ESS)--- for the Longer Term, my own initial reaction & first- view is, --- (and I have not researched the (ESS) Business Operation & Competitive Advantage & Market Opportunity potential in depth) -- is that superficially at least, their is indeed, seemingly ..... a lot of Upside potential for ESS, but investors, ..... may have to wait a little .....for the ESS fruit to ripen ....???

Be also good Liz, imo, if ESS keeps up the news flow: - (as long as it is substantive and relevant) --- especially later after the present Results Season is, "done and dusted", to at least keep a spotlight on ESS, and the intrinsic potential of this operation maybe .... - [?]

My second reflection Liz, is that this company(ESS) reminds me a bit of the ASX listed Scientific Instrumentaion Business --Alpha Technologies, (ASU)--

... And the trick Liz, of course for these type of "high tech" organizations; including ESS presumably--??-- is for management to formulate and construct an effective commercial sustainable Business Model; to provide some form ....of reliable regular on going "Annuity" style repeatable company Earnings & Income; ..... rather than just only to be "locked into" -- One Off bigger box larger Unit Sales ....

So maybe for ESS, they may care to investigate, ...

Maintenance Contracts, licencing exclusivity Agreements, or even to develop a second arm to the ESS scientific Manufacturing/Business Operation; that is related to the current Manufacturing Base....

And, which ALSO taps into ESS's ....>>> as the enterprise is now .... what is presumably, a highly scarce and needful but currently under exploited...>>> Knowledge Capital base.

And then the next step for ESS, to maybe, exploit that already existing "knowledge capital"-- into a high margin "annuity flow" income style operation .... to, under gird the present ESS --OEM(Original Equipment Manufacturer) present manufacturing operation....??--

Anyway Liz, .... Just some food for thought...

Kindest Regards Liz,

Robbo

[Lizard]

Thanks Robbo. Some useful thoughts

[Mick100]

quote:Originally posted by davidrob
[

... And the trick Liz, of course for these type of "high tech" organizations; including ESS presumably--??-- is for management to formulate and construct an effective commercial sustainable Business Model; to provide some form ....of reliable regular on going "Annuity" style repeatable company Earnings & Income; ..... rather than just only to be "locked into" -- One Off bigger box larger Unit Sales ....

So maybe for ESS, they may care to investigate, ...

Maintenance Contracts, licencing exclusivity Agreements, or even to develop a second arm to the ESS scientific Manufacturing/Business Operation; that is related to the current Manufacturing Base....

you really should go and have a look at the website Robbo

A good proportion of earning is coming from replacement parts for the equipment that they sell - there's your ongoing income.

As Liz has pointed out, a good prportion of income is expected to come from the new automated sampling equipment over the next financial yr. I assume this automated gear has been patented.
This is where expansion is expected to come from.

It looks like a sound business plan to me
Managment must be reasonably confident in future earning to be paying out 60% of earnings in dividends.
.

[Bobbyvee]

I'd have to agree with Robbo on this one. Was attraceted to Essa a year or more ago as a company with a niche specialisation in a relevant sector. In the end I gave up as they do not seem to be a growth stock. Dividend OK but share price goes nowhere. For a small cap emerging company this is not IMO sufficient. One would be better invested for example in the big banks for the same return.

[Lizard]

Announced acquisition of Stace yesterday. Small acquisition, but expected to be eps positive immediately. Didn't help the share price though which fell back (though I think it had not traded since going ex-dividend).

Bobbyvee, disagree that you can define a company as "not a growth stock" based on share price movement (or lack of) over a one year period. Personally, would rather let the 5 year record of revenue and profit growth decide that.

[Lizard]

Volume buys arrived of late. I have added this week at 37-38cps.