Shares in Brisbane-based global testing group, ALS fell 6% on Monday after the company slipped through what looks like being a massive hit to its 2023-24 statutory net earnings, as well as what also amounts to a small downgrade to the underlying earnings for the same year.
In a two part release to the ASX on Monday, the profit downgrade was the minor of the two announcements (rolled into one ASX release).
It fact it would be fair to characterise the announcement as being bad news and not so bad news. There was nothing positive at all in the statement.
ALS revealed that its forecast guidance for the year to March 31 (next Sunday) looks like coming up short with full year earnings to be at the lower end of the guidance range of $310 to $325 million when they are released in late May.
Even though that will be better than the $291 million reported for 2022-23, ALS said "Divisionally, Minerals margins have been maintained despite subdued trading through December 2023 and January 2024. Life Sciences has traded as expected. Corporate and interest costs are to be slightly higher” – hence the weaker than forecast outcome.
But that was the good news, if you like. The bad news was the unmitigated disaster the 2021 move into pharmaceuticals in Europe has been that has left a huge stain of red ink across the 2023-24 report and accounts.
The disaster saw ALS impair most of its huge investment Nuvisan, a European contract drug discovery and development group. The poor performance of the company and the strains on the investment has seen the company muttering for months now about having to fix or forget what has been a disaster.
ALS said on Monday that it is taking a massive hit to its $258 million stake Nuvisan only three years after buying 49% of the European group.
ALS said the write down of the “majority” of the stake’s carrying value has been caused by a series of problems at Nuvisan since ALS bought in August 2021 for 150 million euros (now around $258 million).
As part of the 2021 deal, ALS had a call option over the 51% which it has now exercised at "nil cost” .
ALS will now try to save costs and make other changes to save 25 million euros ($41 million) annually. It will take around two years to whip Nuvisan into what ALS thinks is financial shape.
“Nuvisan generated revenues of ~A$245 million in calendar 2023,” ALS said on Monday.
"The transaction is effective 31 March 2024 for financial reporting purposes, to the impairment loss will hit the 2023-24 result, reducing the bottom line to virtually nothing at best. The company will incorporate Nuvisan from April 1 (which we might point out is the start of ALS’s new financial year, and April Fool's Day).
ALS has now worked out that Nuvisan has little or no value and couldn’t be sold, hence an impairment write down.
"Following a strategic review of Nuvisan, ALS has determined that taking full control and ownership of Nuvisan provides the best opportunity to deliver earnings growth and maximum shareholder value optionality.
"Nuvisan will deliver a strategic footprint for ALS in Western Europe and a platform that enables access to the growing global pharmaceutical market, complementing ALS’ existing pharmaceutical businesses,“ ALS said on Monday, when all seems a bit after the event.
"As required by accounting standards, a fair value adjustment process for the initial 49% investment carrying value has commenced and will be disclosed in the FY24 Financial Report released in May 2024.
ALS CEO Malcolm Deane said in Monday’s statement that “Taking full ownership of Nuvisan is a significant step forward in our Life Sciences strategy, providing us access to an attractive market with growth opportunities and further development of our Pharmaceutical platform.
"From its well-established base in Germany and France, Nuvisan is a well- regarded European CRO known for its quality, client reputation and service offering. Its CRO services complement ALS’ existing analytical testing capabilities and are well aligned with the Beauty & Personal Care business.
"The Nuvisan business will undergo a two-year transformation program to drive sales growth in key markets and implement cost reduction measures to improve profitability.
“The management team are committed to improving Nuvisan’s financial performance under our stewardship and expect to deliver overall project returns of low to mid-teens in the medium to longer term.”
Given all that, you have to wonder what happened at Nuvisan between acquisition and the past year when the reported emerged that ALS was unhappy and either wanted out or to take control and take the hit and try ands right the ship.
All that talk about having a well-established base in Europe begs the question – isn’t that what ALS bought 49% for, so what has been going on?
The fact that ALS has had to take a near quarter of a billion dollar hit and buy the 51% stake for nil cost, means it couldn’t find a buyer.
And seeing the impact of the write down will be felt in the March 31, 2023-24 financial year, it should have really mentioned that in the trading update, even if it will be a one off item.
