ALS Ltd ((ALQ)) is negotiating a difficult patch, indicating a substantial lull in laboratory services during April and May yet providing a pleasant surprise for investors with a largely unexpected dividend declared at the FY20 results.
The company has acted quickly to manage the economic downturn and impaired its Latin American life sciences and industrial segment by $90m because of the pandemic and market dynamics, as well as FX.
Citi points out this is one of the key risks going forward, with counterparty credit risk related to insolvencies across a long tail of small clients as well as through the Latin America exposure, neither of which are particularly clear as yet.
Credit Suisse suspects the whole first half will remain challenged but there will be a strong recovery beyond, as the lockdown measures are unwound. Revenue in April was down -9% as the lockdowns accelerated and May is expected to be similar. Geochemical sample flows dropped -30% in the last two weeks of April. Other than these details, management decline to provide guidance ahead of the AGM.
The northern hemisphere field season, which coincides with the first quarter of the fiscal year, is a key period, Ord Minnett points out, and the AGM on July 29 should provide further updates on the impact of the pandemic on the business.
Liquidity at this stage looks adequate to the broker, including a $205m increase in credit facilities subsequent to reporting date. Hence, the company should be able to fund its dividends as well as a reduced capital expenditure plan for FY21.
Goldman Sachs believes the extent of the headwinds from the pandemic in the first half will be the focus going forward, particularly relating to the balance sheet and dividend capacity. The broker does not expect an equity raising and is encouraged by the company’s pricing commentary.
Management has noted stable price trends in both minerals and life sciences over recent months despite the volume declines. The ability to hold onto pricing trends over the next few months will be key to the recovery over the second half, in the broker’s opinion.
Moreover, equity raisings among miners will remain a key factor in presenting upside to estimates as junior explorers return to the market. Macquarie also assesses the focus in coming months will be on mine re-starts, noting ALS has not experienced any material loss of market share in coal as a result of the investigation into its coal certification unit and no material contracts have been terminated.
Citi suspects the trough in earnings in FY21 will be shallower than previously estimated. Price rises are expected to be sticky as the company has indicated these relate to renewed contracts with large customers. At little additional cost, a full year’s contribution from price increases should partially offset any cyclical declines in margin. Citi upgrades estimates for FY21-22 by 16-18% and now assumes a 30% dividend pay-out ratio.
FY20 net profit of $189m was in line with guidance. Commodity earnings (EBIT) were down -3% yet life sciences were up 16% and industrial up 13%. The areas most affected by the pandemic were in asset care, because of the need for employees to work on site. Businesses servicing oil & gas end markets were also affected by the drop in oil demand.
Acquisitions?
The balance sheet is supportive and Credit Suisse suggests management could be aggressive in pursuing the attractive consolidation opportunities that are likely to emerge in the current conditions. The broker also assesses shareholders would support an equity raising if there was a large attractive proposition.
ALS has been successful in integrating recent acquisitions which the broker believes should instill confidence. Still, Credit Suisse notes there is no need to raise capital to fund growth with around $650m in liquidity available.
Management has reaffirmed a strategy for bolt-on acquisitions but appears to be cautious about re-stating its previous target of $100m in acquisitions per year. The focus is on food and pharmaceuticals within the life sciences segment and Tribology in the industrial segment.
Virus Testing
In life sciences, Goldman Sachs expects significant margin compression in the first half and considers this segment is most at risk from muted environmental testing once restrictions are lifted. However food and pharmaceutical are expected to be resilient.
In this area, Macquarie notes ALS is undertaking 500 tests a day for coronavirus swabs in Europe and is expanding this testing to other regions. Over the longer term there should be a substantial opportunity for virus testing as it becomes a regular way of life for monitoring in offices, transport and at events.
This service is currently part of the company’s food segment and, although difficult to quantify, signals to Macquarie an attractive potential long-term opportunity. The company is building a program for environmental monitoring to indicate where hotspots are and provide recurrent testing.
Morgans expects a recovery relative to the April-May trough over FY21, although notes there are several aspects of the outlook which are simply too early to call. Still, the company’s status as an essential services provider and relatively undemanding FY22 valuation metrics, as well as experience in managing cyclical downturns, places the business in good stead. ALS has a history of attracting a market premium as a higher quality industrial stock, the broker adds.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Neutral rating and a $7.80 target, anticipating minerals earnings will recover quickly as conditions stabilise and site operating restrictions are lifted, amid continuing strong gold price action.
The database has three Buy ratings and three Hold. The consensus target is $7.68, signalling 5.5% upside to the last share price targets range from $6.40 (Ord Minnett) to $8.31 (Citi).
