XRF Scientific Limited (ASX: XRF) manufactures and markets specialised chemicals and instruments for the scientific, analytical and mining industries. It produces and distributes laser plasma spectrometers which are used in the analysis of a variety of minerals, chemicals, soils and industrial material. XRF’s products are particularly well suited to the mining industry for the measurement and grade of ore.

The company also supplies platinum products to laboratories, undertakes specialist repairs of equipment such as wire meshes and cathode cages. It also designs and manufactures heat-treatment furnaces, specialist furnaces, ovens and other equipment for laboratories.

Some of its clients include Campbell Brothers Limited (ASX: CPB), BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Newcrest Mining Limited (ASX: NCM) and Iluka Resources Limited (ASX: ILU).

XRF scientific doesn’t compete with Campbell Brothers, with Campbell Brothers being more of a provider of laboratory and analysis services, utilising products sold by XRF Scientific.

Recent performance and Outlook

For the six months to December 2011, XRF generated revenues of $12.4m, up 44% over prior corresponding period. Net profit was up 58% to $1.62m.

Sales are up strongly in all divisions and strong organic growth is expected during 2012. The balance sheet is solid, with cash of $5m, and no material debt ($0.2m).

The company has decided not to pay dividends this period, which is sensible. Better to keep the cash and use it internally, especially when return on equity is over 15%, and likely to increase in future. Management expects the second half of the year to be stronger than the first half, based on previous history.

Campbell Brothers recently acknowledged that its mineral labs business was experiencing record levels of mineral sample flows well ahead of the previous boom period. That should be good news for XRF.

The recent acquisition of Sigma Chemicals, and 20% investment into Canadian chemical flux manufacturer Scancia also augurs well for the future.

The company has continued to focus on expanding geographically, by increasing sales into Brazil and Africa.  XRF Scientific continues to look for acquisitions to provide more products and services to the company’s existing clients.

Risks

It should be fairly obvious by now, that XRF Scientific is heavily dependent on the resources sector, and that is the major risk to the business.  The more exploring, drilling and analysing that is done, the better the results for XRF. Should commodities prices fall, it’s likely that there will be a fall in demand for its products, as happened in 2010, when there was a significant downturn in mining activity.

The Foolish bottom line

Directors and management hold 21.6% of the company – which is a good sign. Owners of companies have more incentive to produce good long-term reuslts, so shareholders are more likely to achieve a better outcome. The chance of a dividend for the second half of FY2012 is unlikely, but possible, with management declaring a policy of paying out 50% of net profit after tax – subject to conditions.

XRF scientific is currently trading on a forecast P/E of 9.9, despite the price rising over 21% in the last 3 months. If you believe the resources boom still has a lot of life left in it, and with its potential for growth, this P/E appears undemanding. XRF Scientific appears to be worthy of further research.

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Motley Fool contributor Mike King doesn’t own shares in any of the companies mentioned. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy

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