Eco Investor March 2017

Pre-Profit Securities

Two More Acquisitions for HRL

HRL Holdings has been growing its environmental laboratory services business through acquisitions and has just closed a capital raising that targeted $8.5 million to pay for two more businesses. A placement raised $2.75 million, but shareholders were cautious and an entitlement offer raised only $0.69 million. Fortunately the offer was underwritten to $5 million so the total shortfall was only $0.77 million.

The problem may have been that the share price fell to the offer price of 10 cents during the offer period, but immediately afterwards it was back above it.

The acquisitions are OCTFOLIO and Morrison Geotechnic. OCTFOLIO is a developer of software for the asbestos and hazardous materials market; Morrison Geotechnic is a Queensland geotechnical engineering and NATA laboratory testing firm.

OCTFOLIO's software can be customized for workplace health and safety applications such as hosting hazardous materials (HAZMAT) compliance data and registers, quality management and laboratory management systems, field surveying, data migrations, and training.

HRL knows the company and the software as it has previously outsourced services to OCTFOLIO. It said the software has been a significant contributor to its success in winning large ongoing contacts with large corporate and government clients and HRL expects this to continue as the software is different from other solutions and gives it a point of difference from other environmental service businesses.

Morrison Geotechnic provides engineering and laboratory services to the civil, engineering and construction industries. Established 17 years ago, it has branches in Brisbane, Gold Coast and Sunshine Coast and has completed over 12,000 projects.

Its services cover geotechnical investigations and studies; works designs and inspections; construction phase verification; earthworks supervision; soil, concrete and aggregate testing in its NATA accredited laboratories; and onsite mobile laboratory testing.

HRL said Morrison has industry leading performance, a blue chip customer base and a high level of repeat revenues with around 65 per cent of revenue from existing major customers and referrers. Its management team will continue with the business after the acquisition.

Morrison Geotechnic will give another HRL subsidiary, OCTIEF, the ability to bid on major infrastructure projects that until now were not available to it.

On the financial side, Morrison is being acquired for up to $4.5 million with $3.75 million in cash and up to $750,000 as a cash earn-out. OCTFOLIO is being acquired for up to $3.5 million of which $2.75 million is cash and up to $750,000 as a cash earn-out.

Morrison has had revenues of over $7.5 million over the past four years, and a three year average normalized earnings (EBITDA) of $1.3 million. Its revenue for the six months to 31 December was $4.8 million. OCTFOLIO's interim revenue was much more modest at $315,253.

OCTFOLIO and Morrison are expected to be immediately earnings per share accretive.

HRL said there are expansion opportunities for the acquisitions and potential synergies between them. Further savings are expected from the services that HRL previously outsourced to OCTFOLIO.

HRL grew its interim revenue by $1.2 million to $5.4 million. But net profit of $0.3 million for the December 2015 half year fell to a small loss of $8,000 for the December 2016 half.

On a pro-forma basis, Morrison and OCTFOLIO would have increased HRL's interim revenue to $10.6 million and its profit after tax would have been $0.55 million.

OCTFOLIO and Morrison Geotechnic are HRL's fifth and sixth acquisitions since September 2014.

HRL remains a company with promise. It has done well in refocusing from geothermal energy exploration to providing environmental and hazardous materials testing and analytical services. The revenue line is growing and will continue to grow strongly with the latest additions, but this growth needs to show up in the bottom line. (ASX: HRL)

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