Company Reports

No-moat ALS has announced that underlying net profit after tax to March 2024 is expected to be at the lower end of the standing AUD 310 million-AUD 325 million guidance range. The materials testing specialist says higher-than-expected corporate and interest costs are at the core of this. We reduce our forecast to AUD 310 million from AUD 320 million, and our new earnings per share forecast is AUD 0.64. Our dividend per share forecast declines in parallel to AUD 38.4 cents, equivalent to only a moderate 3.0% part-franked yield at the current share price.

ALS is a global provider of analytical testing and inspection services; it also has a small Australian-focused distribution business. While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in nondestructive testing and inspection.

We increase our fair value estimate for no-moat-rated ALS by 2.5% to AUD 8.60, driven largely by the time value of money. The materials testing specialist also reported stronger-than-expected first-half fiscal 2024 NPAT, which is additional support to the upgrade. Underlying first-half fiscal 2024 NPAT fell 4% to AUD 158 million, 7% ahead of our AUD 147 million target. Higher-than-expected revenue and margins from the minerals segment supported that outcome.

ALS is a global provider of analytical testing and inspection services; it also has a small Australian-focused distribution business. While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in nondestructive testing and inspection.

We maintain our fair value estimate of AUD 8.40 for no-moat-rated ALS, with the materials testing specialist screening as still materially overvalued. ALS shares are down 6% year to date, and the share prices of global competitors in the nondestructive testing and inspection space such as Bureau Veritas, SGS, and Intertek have followed a similar path due to a softer outlook in the mining industry.

ALS is a global provider of analytical testing and inspection services; it also has a small Australian-focused distribution business. While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in nondestructive testing and inspection.

We increase our fair value estimate for no-moat ALS by 6% to AUD 6.75. Some is due to time value of money, but we also increase revenue and earnings expectations for the life sciences segment. Our fiscal 2023 and fiscal 2024 EBITDA forecasts for life sciences increase 12% to AUD 324 million and 25% to AUD 363 million, respectively. Life sciences currently comprises just over half of group earnings, and we increase our fiscal 2023 and fiscal 2024 EPS forecasts by 4% and 12% to AUD 0.55 and AUD 0.64, respectively. Favourable macroeconomic trends support stronger growth expectations for key life sciences end-markets than we had previously credited. Our earnings forecasts equate to fiscal 2023 and fiscal 2024 P/Es of 20 and 18 at the current share price.

ALS is a global provider of analytical testing and inspection services; it also has a small Australian-focused distribution business. While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in nondestructive testing and inspection.

ALS announced first-half fiscal 2015 earnings results, which indicated a surprisingly stronger-than-anticipated underlying net profit after tax, or NPAT, of AUD 67.7 million, against the company's forecast of AUD 64 million. Nevertheless, it should be reinforced ALS's first-half result is still 33% lower than first-half 2014. The reasons for the lower earnings are the same issues which have plagued the company for the past 12 months: deteriorating demand for minerals testing, pricing pressure from life-sciences customers and integration issues with the oil and gas services business acquisitions. Weak operating cash flow, down 13% to AUD 87 million, resulted in the interim dividend being reduced by 42% to just AUD 0.11 per share, partially franked. Management did not provide specific fiscal 2015 guidance but noted the December quarter NPAT would be approximately AUD 40 million and March quarter NPAT "remains difficult to predict".

ALS continues to make good on its strategy to increase earnings diversity, acquiring two businesses in the global energy sector: Reservoir Group, a global provider of oil and gas services, and Australian based niche gas testing business Earth Data.

Given the list of mining service businesses who reported significant downgrades over the past week it was welcoming to see ALS ALQ report fiscal 2013 underlying net profit after tax of AUD 237.9 million, up 6.9%, in line with guidance and our AUD 238.1 million forecast. Revenue from the core laboratory businesses increased 12.1%, mainly due to acquisitions with organic growth of 3.5%. Earnings before interest and taxes (EBIT) margins were flat at 23.4%. The full-year result masks the stark contrast between the halves though, with a significant slowdown occurring in the second half. ALS minerals reported large volatility with second-half 2013 revenue down 18.8% and EBIT down 29%, as margins dropped from 36.9% to 32.1%. No guidance was provided, but management's earlier optimism of a return to growth by the end of calendar 2013 was downplayed. Sample flows remained soft in recent months, but management noted there has been no acceleration in the slowdown. Cost-cutting initiatives are being implemented to support earnings. In addition to reducing hours worked to control capacity, some sites will also be mothballed, with samples sent to the nearest lab--a key benefit of its large hub-and-spoke network.

At the time of the first-half 2013 result, ALS ALQ management provided guidance for fiscal 2013 net profit after tax (NPAT) between AUD 235 million to AUD 255 million, implying second-half earnings flat to 17% lower than second-half 2012. Our fiscal 2013 forecast of AUD 248 million is in the middle of this range. However, falling precious metal prices have reduced exploration spend and threaten the feasibility of marginal expansion projects. Wet weather along the east coast of Australia has also pressured volumes during the March 2013 quarter. To account for these factors our fiscal 2013 forecast is trimmed 4% to AUD 238 million. Lower gold and copper prices have a larger impact on our fiscal 2014 forecast, down from AUD 235 million to AUD 217 million.

First-half 2013 net profit after tax (NPAT) increased 32.5% to AUD 135.5 million, the midpoint of management guidance between AUD 130 million and AUD 140 million. The result was slightly below our expectations, but given a substantial part of earnings is tied to volatile mining and exploration activity, the small miss is not alarming. Shareholders have come to expect strong growth, and the first-half results did not disappoint with revenue increasing by 24% to AUD 771 million, and operating margins excluding the divested chemicals businesses firming by 150 basis points to 26.8%. Upgrading assets of acquired facilities to bring them in line with ALS efficiency and refurbishing existing sites has driven growth and margins. ALS has seemingly avoided the pressures of an uncertain resources market in the first half, but guidance of a softer second half reinforces our high uncertainty rating, attributable to exposure to mining exploration and production activity.