Shares in testing giant ALS (ALQ) shook off a small first half downgrade revealed at yesterday’s annual meeting in Brisbane to close up more than 3%.
At the same time chair Nerolie Withnal revealed the company will be paying out lower dividends in coming years so that the payments can be as fully franked as possible.
The downgrade of only a couple of million dollars obviously didn’t come as a complete surprise to the market, but the shares ended the day at $5.48, thanks to a solid rise in afternoon trading.
That was also shrugged off by investors who appreciated the commitment to franking as much of the payout to shareholders as possible – something that will become increasingly difficult given the rising share of offshore revenue and profits for ALS.
Ms Withnal told the meeting that while ALS is seeing "growth in our Life Sciences, Tribology, and Mineral Inspection businesses, and flat operating conditions in our Minerals business, we have seen declines in our Coal, Oil & Gas and Asset Care businesses".
As a result, she said the company now expects first half underlying after tax profit to be in the range of $60 to $65 million, compared with $67.7 million in the first half last year.
"This guidance assumes no material change in market activity levels and no material adverse events in the Group’s business activities for the remainder of the first half of the 2016 financial year,” she told the meeting.
Because ALS is one of the biggest testing groups in the world, straddling the environment, mining, oil and gas, food and add on services, it’s warning of another weak profit performance tells us that the rest of huge resources services sector in this country will still do it tough.
Ms Withnal told the meeting that "Markets for our services remain challenging in an environment of low commodity prices. This brings a strong cost focus from most clients and therefore pricing pressure in our businesses.”
ALQ 1Y – ALS between a rock and a hard place
Turning to the future dividend payout levels, the chair said ALS has traditionally paid out approximately 70% of earnings per share in dividends.
"The majority of the funding for the growth of the Company has therefore come from divesting non-core assets, renounceable rights issues, and of course borrowings,“ she told the meeting.
"A decade ago, 58% of our taxable came from Australian operations allowing us to frank dividends at 100%. Last year our Australian operations generated 22% of taxable earnings meaning that the dividends last year were only franked at an average of 17%. As the Company continues to grow, more and more of our earnings will come from overseas operations, further impacting our ability to frank dividends.
"In this context the Board continues to review the capital structure of the Company weighing up the overall value to shareholders of ways in which earnings are used. These include paying dividends, reducing debt, funding acquisitions and potentially buying back shares on market.
"It is important to get this balance right in order to drive the best financial outcome, total shareholder return, for all shareholders. Whilst the capital structure review is ongoing, I wish to flag that in future there is likely to be a lower dividend payout ratio.
"However, we do note that franking credits are more valuable in the hands of shareholders and therefore any dividend should at the very least allow distribution of 100% of the franking credits,” the chairman added.
ALS CEO Greg KIlmister told the meeting the company’s various businesses were facing a mixed outlook
"For our non-cyclical businesses our expectation for the half year is that the Life Sciences Division will see underlying profit increase by approximately 20 percent; tribology will be up by approximately 10 percent; mineral inspection up by 30 percent; and Asset Care down by 20 percent due to a tailing off of CAPEX exposed major construction projects in the LNG and mining sectors,” he said.
"The businesses exposed to cyclical markets remain in very challenging conditions as we cycle through the downturn. For our Geochemistry and Metallurgy businesses we expect underlying profit to be up slightly compared to last year as markets stabilise and we see the benefits of cost reductions put in place through the year.
"For our Coal business we expect underlying profit to be down by 20 percent due to continuing market contraction outside of Australia and ongoing pricing pressure. We expect our Oil & Gas businesses to be marginally profitable in the first half before improving through the second half of the year,” Mr Kilmister told the meeting.
