As mineral exploration ramps up and economies re-open the laboratory services of ALS Ltd ((ALQ)) are to the fore. Increased volumes of minerals testing meant geochemistry sample flows were up 13% in the third quarter.
Goldman Sachs notes essential services demand has also ensured life sciences volumes remain stable, while the industrial division is more mixed and asset care activity challenged. Yet, the latest update shows both junior and medium-sized miners contributed to the growth in geochemistry in the third quarter.
Macquarie notes the amount of money raised by junior explorers is yet to be used in a significant way, given the northern hemisphere winter, but the field season will open up over the next few months this should become more evident.
Capital raisings for mineral exploration in Canada have increased 207% for the six months to February and are up 15% in Australia over the same period. There is a typical three-month lag between capital raising and exploration activity and gold and copper represent around 50% and 20%, respectively, of global mineral exploration expenditure.
Macquarie points out gold has done the heavy lifting so far, representing 62% of revenue in the third quarter, but a large rally in copper prices should mean exploration activity in that area gathers pace, along with other base metals.
Macquarie also points out expenditure by governments on infrastructure, such as renewable energy and electric vehicles, will underpin copper-related exploration going forward.
The broker highlights commentary from Major Drilling, which noted that in the last growth cycle Canadian activity picked up first followed by Latin America, and commodity prices are now attractive enough for this to occur again. Current copper prices, that company asserts, signal “there is money to be made”, and gold is in a similar position.
All this augurs well for ALS and Macquarie highlights the stock is currently trading at a -24% PE discount to global diversified peers compared with a five-year average of -9%.
The main headwind UBS observes is the Australian dollar, leading to reductions to FY21-22 forecasts of -4%, yet the broker remains encouraged by the ongoing recovery in geochemistry testing. Nevertheless, UBS believes the stock is adequately pricing the improvement in exploration activity and the normalisation of life sciences demand as economic activity recovers post the pandemic.
Group earnings (EBIT) in FY21 are expected to decline -7%, which UBS asserts is “remarkable” in the face of the impact of the pandemic on global economic activity.
CLSA found the trading update reasonable and infers that, even in local currency terms, ALS is resilient, although agrees there is a material currency headwind going forward.
Ord Minnett raises its rating to Hold from Lighten in acknowledgement of the improvement in the geochemistry outlook, and reduced concerns about the impact of the pandemic amid ongoing roll-out of coronavirus vaccination programs.
Acquisitions
The company has acquired Investiga, a pharmaceutical testing business with operations in Brazil and the US east coast. This business focuses on cosmetic and personal care and generated $20m in revenue in FY20.
Macquarie observes ALS has been disciplined as it goes about making acquisitions. This one is considered sound as the US is strategically significant, representing over a quarter of the global market.
Moreover, the acquisition will be funded via debt and there remains a solid balance sheet with more than $600m in available liquidity. ALS is acquiring the business at 11x FY20 earnings. Assuming margins of 20-25% Goldman Sachs calculates a purchase price of $44-55m.
The broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and envisages around 26% upside potential to its $12.00 target. CLSA, also not one of the seven, has an Outperform rating and $10.26 target.
There are four Buy ratings and three Hold on the database with a consensus target of $10.18 that suggests 8.5% upside to the last share price.
