ASX small caps with blue-chip profiles: XRF Scientific

The world's biggest central banks are set to reverse a record string of rate hikes – and stocks towards the small end of town are widely expected to benefit. In this series, we're going to take a deep dive into profitable small caps with unique businesses and strong balance sheets.

XRF Scientific (ASX: XRF) manufactures equipment and chemicals for miners, construction material companies and commercial analytical laboratories. The company has facilities across Australia, Europe and Canada, plus a global network of distributors to service multinational blue-chip customers like BHP, Rio Tinto and South 32.

XRF's technology is used to measure the composition and purity of materials, largely applied in industrial quality control for manufacturing processes across sectors such as mining, construction and chemicals.

XRF Scientific at a glance

• Market cap: $175 million

• Cash on hand: $8.3 million as at 31 December 2023

• Debt: $2.9 million

• Shares on issue: 138 million

• Share price performance: Up 11% year-to-date and up 4% in the past twelve months

Latest results

The company's first-half FY24 results (announced on 20 Feb) delivered some solid numbers, including:

• Revenue up 6% to record $28.6 million

• Net profit up 20% to record $4.5 million

• Earnings per share up 18% to 3.3 cents

The results session was rather volatile, with the stock closing the session 3.1% higher from session lows of -5.75%. XRF recently provided a March quarter update, which noted:

• Revenue up 13% to $15.2 million

• Profit before tax up 15% to $3.2 million

• "We expect the June 2024 quarter to be positive for all divisions. During this period our key growth focus areas are new product developments, international sales growth and M&A opportunities."

What makes XRF interesting?

XRF has a solid track record of growth: The company's net profit has growth at a compound average growth rate of 49% between FY17-23 (off a relatively low base). In the past two years, net profit growth has averaged 22.5%.

Three business divisions: XRF's first-half FY24 revenue is evenly distributed among its three business divisions. Here's a simple breakdown of what they do:

• Consumables: Provides consumable products for XRF (X-ray fluorescence) analysis. These consumables include various types of sample preparation equipment, such as fusion fluxes, platinum labware, sample grinding equipment, and sample cups. The company noted "continued robust demand from the mining sector driven by production and exploration," for this business segment in its first-half FY24 results.

• Precious Metals: This division offers a range of products and services tailored to the analysis and processing of precious metals such as gold, silver, platinum and palladium. This includes specialised equipment and processes for refining, assaying and analysing metals with high accuracy and precision.

• Capital equipment: Focuses on providing high-quality XRF instruments and related equipment for mineral analysis. This includes benchtop and handheld XRF analysers as well as laboratory-grade XRF spectrometers.

Precious Metals recovery: The Precious Metals division experienced a 9% drop in first-half FY24 revenue, reflecting challenging economic conditions in Germany. The company expects as stronger performance in the second half, based on current orders.

Growing capital equipment demand: XRF says its current order book for capital equipment is at record levels, with "production for some products booked out past 2H24, despite production capacity increasing ... The demand is being driven by a mix of mining and industrial customers globally." The company also expects to release a number of new products over the course of 2024.

Putting it all together

XRF has demonstrated a pretty solid track record of growth, albeit with a recent moderation in growth rates as it gathers scale and begins expanding into international markets. The business is inherently leveraged to some popular themes such as gold and battery metals due to its products and services.

In terms of its share price performance, XRF has far outpaced peers like Imdex (ASX: IMD), ALS (ASX: ALQ) and Mitchell Services (ASX: MSV) over a five year period, up 610% vs. 111%, 64% and -31% respectively.

More recently, the larger cap names (Imdex, ALS and XRF) are mostly trading around breakeven for the past twelve months.

XRF (green) vs. peers MSV (purple), ALS (red) and Imdex (yellow) | Source: TradingView

Disclaimer – The author does not own any shares in XRF Scientific. Market Index is not affiliated with any of these companies. The information provided in this article is for educational purposes only. It is not intended to be a substitute for professional advice or recommendations. Always conduct your own research and consult with a qualified processional before making any decisions.