Eco Investor March 2016

Pre-Dividend Securities

HRL Upgraded to Pre-Dividend Security

HRL Holdings' strategy of refocusing from geothermal energy to environmental services has paid off with the company announcing a net profit for the December half of $339,297. The December 2014 half year loss was $1.48 million. Although the profit is modest, the underlying net profit was also positive at $556,014 and Eco Investor has upgraded the company from a pre-profit to a pre-dividend security.

With three acquisitions now behind it, a feature of the latest accounts is a more than doubling of interim revenue from $2 million to $4.2 million for the latest half year. The balance sheet also looks basically sound with net assets of $6.8 million after total liabilities of $1.6 million. Cash is fine at $0.7 million and borrowings are low at $0.5 million. But a weak spot is very high goodwill $4.9 million.

The growth-by-acquisitions strategy continues with a fourth acquisition, NZ drug screening business RJL & Associates, which settled in February.

The deal saw HRL's New Zealand subsidiary Precise Consulting and Laboratory Ltd purchase the business assets of RJL & Associates for NZ$0.5 million. RJL is located in the Palmerston North area of the North Island. Taking on the RJL team will see Precise expand its services to include property contamination testing and work place drug testing services.

HRL said clandestine methamphetamine laboratories or "Clan Meth Labs" are a growing problem in New Zealand and only a fraction are discovered by authorities. The majority can be left undetected for years and can pose significant health risks to tenants. Heavy methamphetamine consumption and distribution can similarly contaminate premises including surfaces, furnishings, insulation and drainage systems.

New government legislation requires landlords to provide a property to a tenant in a reasonable state of cleanliness. If landlords rent out a property that is contaminated by meth, they are breaching their obligations under the Residential Tenancies Act 1986, the Building Act and the Health Act. The legislation has created what HRL says is substantial demand for pre-tenancy testing for meth. This can include initial testing for indications of contamination and more rigorous follow up testing and remediation.

Precise's Property Contamination Testing services also include reports to landlords, councils and insurance companies and testing for precursors, volatile organic compounds, soil testing, heavy metals, and mould.


HRL’s drug testing service.

Precise will also offer work place drug testing services. Employers have a responsibility under Health and Safety regulations to make the workplace safe for employees and other people, and an employee impaired by alcohol or drugs is defined as a hazard. Precise will offer employers urine and oral testing solutions across New Zealand. RJL's business assets include mobile testing vehicles equipped to allow work place drug testing wherever an employer requires it.

HRL funded the purchase of the assets from current cash and banking facilities.

The Palmerston North office adds to HRL's presence in Brisbane, Darwin, Canberra, Christchurch and Wellington.

The RJL acquisition follows the acquisitions of environmental consulting and laboratory business OCTIEF in September 2014; NZ based environmental consulting and laboratory business Precise Consulting in April 2015; and Canberra based environmental consulting and laboratory business AAC Environmental in October 2015.

HRL's environmental services now cover:
- Managing asbestos and other hazardous materials such as lead, mould, and clandestine laboratories. This includes the $1 billion Mr Fluffy loose-fill asbestos insulation demolition program in the ACT.
- Screening properties for contamination, such as methamphetamine.
- Building and contaminated land assessment
- Soil and ground water sampling
- Dust, noise and vibration monitoring
- NATA/IANZ laboratory analysis
- Training.

The company said it has laid the foundations for growth in 2015-16 and 2016-17, and it has cash and bank facilities for further expansion and acquisitions. It also intends to extend the NZ drug screening service to Australia, and to expand the Canberra branch's contaminated land and water testing services throughout the ACT and central NSW.

Investors are buying the story. The shares recently doubled to a five year high of 17 cents. It is encouraging for environmental investors to see one of Australia's former geothermal energy explorers doing well in its new environmental business. (ASX: HRL)

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