DGL delivers record first half and upgrades guidance

Bell Potter maintained its Buy on DGL Group (ASX: DGL) and has increased the price target to $3.50 from $3.00 after the company delivered a first half FY22 result well ahead of the broker’s expectations late last week.

Up 139% on the previous period, the Melbourne-based waste management company first half earning of $23m were a beat against the $17.9m the broker was expecting.

DGL CEO Simon Henry attributed the outstanding results to favourable trading and climatic conditions across the group and the successful integration of the acquisitions completed over the reporting period.

To the uninitiated, DGL is a diversified industrial group of companies operating across Australia, NZ and globally.

Last December, the group completed the acquisition of Austech Chemicals Pty Ltd, a company manufacturing automotive chemicals.

Among other businesses acquired last year were:

• Opal Australasia — a chemical manufacturer (completed September 2021)

• Aquapac — a water solutions company (completed October 2021)

• Profill Industries — a chemical manufacturer (completed November 2021)

• Ausblue — Adblue distributor (completed November 2021)

• Shackell Transport — a bulk liquid and other freight company (completed December 2021)

Management believes acquisitions will “preserve significant portions” of the businesses while “increasing DGL’s breadth of products, services, customers and geographies”.

Utilisation ramp up

DGL expects its utilisation ramp up experienced in the second quarter to continue into the second half FY22 and has guided to statutory full year FY22 earnings of $54.0m, well ahead of Bell Potter’s $42.9m, which the broker notes marks a circa 30% upgrade to FY22 consensus (previously $41.9m).

While the share price was up by as much as 17% following last week’s announcement, the price is -4.38% down heading into the close today.

Due to its potential for future growth, January saw DGL included among the top 20 small cap ASX shares listed in fund manager Wilson Asset Management’s Microcap portfolio.

Agile response to supply shortage

After rebasing forecasts for DGL’s earning beat, Bell Potter has revised earnings by 28.3%, 9.9% and 3.1% in FY22, FY23, and FY24 respectively.

The broker sees DGL’s agile response to supply shortages, especially AdBlue, as helping to confirm DGL’s ‘Total Product Management’ strategy plus the large network upside of its chemicals, transport and liquid waste vertical.

Bell Potter continues see a strong outlook for FY22 revenue and earnings growth due to a second consecutive bumper crop forecast; elevated lead prices and high exit utilisations; persisting tight supply lines; and a likely strong forward order book of AdBlue and Koala Auto Kare coolants.

However, the broker recognises that DGL faces competition from more capitalised operators. Then there are numerous OHS associated risks and integration risks associated with recent acquisitions.