It was a case of good timing when testing and services group ALS Ltd (ALQ) reported its interim financial figures yesterday.
The company revealed an “underlying” net after tax profit of $67.7 million for the six months to September 30 – well under, in fact 33% lower than the $100.8 million earned in the first half of 2013-14.
That normally would have seen the shares sold off, even if the actual figure was a bit higher than the $64 million guidance provided by the company earlier in the year – good news, relatively speaking.
What made it fabulous news from an investor’ point of view was the timing – ALS released its interim report into a market rebounding strongly on the back of the surprise cut in official Chinese interest rates on Friday night, our time.
Had the report been released on any day of last week, when gloom and doom gripped the market for five days, then yesterday’s very positive market reaction would not have been so dramatic.
The local market yesterday was the combination of a ‘buy anything to do with resources and services’ (the market sectors to have copped much of the selling pressure in recent months, especially with iron ore prices falling, along with oil) which saw ALS’s share price surge strongly, ending up more than 17% to $5.25.
ALQ YTD – ALS shares jump off low base
The question now, as it is for the rest of the local market, is whether these gains are sustainable. Judging by the headlong charge into the market yesterday, you’d have to say now – it was a ‘sugar hit’ bounce that will prove to be unsustainable.
ALS said the interim statutory net profit after tax (including amortisation of acquired intangibles, restructuring and related costs, divestment write-downs and acquisition costs) was $58.4 million, down 40% on the $97.7 million recorded in the September 2013 half year.
And like previous forecasts from the company – the outlook for the rest of the year is both muted, and not very clear.
CEO, Greg Kilmister said in yesterday’s statement that, “The Board once again did not intend to provide specific profit guidance for the full year to 31 March 2015, but has provided some comments around the third and fourth quarters of the ALS financial year.
“After tax group net profit for the December 2014 quarter is expected to be approximately $40 million. This represents an improvement in performance over each of the first two quarters ($30.0 million and $37.7 million) of the current financial year.
"The fourth quarter however remains difficult to forecast. The fourth quarter is the off season for global mineral exploration, and environmental activity in the northern hemisphere is reduced during the northern winter. Offsetting this, ALS expects to see the benefits of the restructuring and cost control initiatives undertaken during more recent months.
"The Company also expects a better performance from its Oil & Gas businesses following the strategic review completed in October, as those plans are progressively executed. However, because of the ongoing volatility in end markets for the Company’s services, we see it prudent not to provide full year guidance until markets settle into a more normal pattern.”
But as always, the dividend decision from the board tells us a lot about how management and directors see the outlook.
In the case of ALS, they are not very confident and took a very conservative route by chopping interim payout to shareholders to just 11c a share from 19c for the first half of 2013-14.
Directors said the company dividend reinvestment plan will operate for the interim dividend at a 5% discount to market price. “The Company noted that franking will likely increase to 30% partly franked for the final dividend for the current financial year,” directors said.
That again tells us the company’s outlook is much less rosy than yesterday’s market reaction would have us believe. Looking at the interim figures and it’s clear ALS management has done well in tough market conditions.
Revenue of $769.1 million was up 3% on the previous half year (many other companies in the mining and related services sector have reported falls in revenues).
But as is to be expected, however reduced mineral exploration activity, pricing pressure and a changing revenue mix cut into ALS’s profit margins.
ALS Chairman Nerolie Withnall said in yesterday’s statement that that trading during the period was impacted by continuing tight market conditions in all sectors.
“ALS Minerals experienced a 22% reduction in revenue compared with the September 2013 half with all geographic regions being affected.
“All other ALS testing and inspection services divisions recorded revenue increases over the corresponding period last year. Pricing pressure for coal services and internal issues with parts of the Oil & Gas business led to ALS Energy’s underlying contribution margin falling from 25% to 11%.
“The Group remains focused on cost management and right-sizing the businesses for the current market. This, together with the ongoing development and integration of the Oil & Gas business stream within ALS Energy, positions the Company strongly for future growth as markets recover,” Ms Withnall said.
The company sold its hospitality supplies business Reward Distribution on 31 October 2014 generated approximately $22 million for the group.
