Major testing group ALS (ALQ) reported the expected downturn in revenue and profit for the six months to September 30 yesterday, and not surprisingly, declined to give any guidance for the rest of the 2013-14 year.
The ALS announcement met the lowered guidance from earlier in the year, but the lack of any guidance for the rest of the year confirmed that the resources sector in particular remains very tough, as we have seen in recent weeks with downgrades led by WorleyParsons, Monadelpheous, Ausdrill and Forge Group.
But seeing ALS’s lower result had been well anticipated by the market, the shares only eased 20c, or 2.2%, to close down at $8.92.
The most important point about the ALS statement yesterday was that there were no surprises in it for the market, unlike the downgrade last week from WorleyParsons which promoted a 25% price fall.
There was also evidence the company’s increasing spread of assets across all sections of resources, and into environmental, food and pharmaceutical industries, is helping offset some of the slide in income from the more traditional mining sectors such as coal. Water testing is a rapidly growing business here and in the US, for example.
The company revealed yesterday that net profit of $97.7 million was down 28% from the first half of 2012-13. But it was also within group guidance of a net profit of between $90-110 million for the half.
The lower profit was struck on an 8.5% dip in group revenue to $745 million, and the interim dividend was cut 2c to 19c a share.
Markets for geochemical and coal services were ‘‘challenging’’ the company said, against the backdrop of weak commodity prices and cost cutting by clients.
ALQ YTD – ALS doesn’t surprise market with its earnings fall and lower dividend
In fact CEO Greg Kilmister said in yesterday’s statement that while the board did not intend to provide specific profit guidance for the full year to March 2014, it has provided some comments around the third and fourth quarters.
“Trading over each of the last three months to the end of October has been flat and we expect the after tax group net profit for the December 2013 quarter to be approximately $47 million.
"This is in line with the performance in each of the first two quarters ($45.2 million and $52.5 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, the fourth quarter is the peak drilling season for oil and gas in North America.
"As the company has yet to operate an oil and gas business through that quarter and because of continuing uncertainty in global mineral markets, we see it prudent not to provide full year guidance until we have further certainty.
“Overall, we remain confident that our current diversification strategies, operating model, and focus on cost management and right sizing the divisions for current markets, position the company strongly for future growth.”
ALS Chairman Nerolie Withnall said in the statement that the result represented a sound financial performance in uncertain economic conditions, demonstrating the benefits of the scalability of the Group’s businesses and its diversified global footprint.
“Markets for geochemical and coal services were challenging, in an environment of falling commodity prices, scarcity of development capital, and a strong cost focus by most producers.
“Geochemical sample flows in ALS Minerals were down by approximately one-third compared with the same period last year, with North America the most affected. Contribution margins remained in the targeted range as the business benefited from the cost flexibility provided by its hub and spoke model," she said.
All other ALS testing and inspection services divisions recorded revenue increases compared with the previous corresponding period.
The ALS Industrial division returned solid organic revenue gains in both of its business lines, whilst the ALS Life Sciences and ALS Energy divisions benefited from both organic revenue growth and the impact of acquisitions over the past twelve months, especially the Energy division’s acquisition in August 2013 of oil and gas services and equipment provider, Reservoir Group.
Mr Kilmister pointed out that the company’s diversification policy had helped protect it against a greater fall in revenues and profits.
He said that although the contraction in Group operating profit for the half year was mainly due to the decline in the Minerals Division, it is worthy to note the success that the company has had over more recent years in diversifying its profit base.
“The operating profit for the Minerals Division for H1FY14 ($63m) is almost identical to that of H1FY09 ($65m) and yet the Group operating profit is up over 50% compared to H1FY09 ($57m); before the GFC.
“This is a very positive outcome and demonstrates the company’s diversification of its testing services base outside of the cyclical minerals (specifically exploration) markets, into areas such as Oil & Gas and Food/Pharma businesses which will assist in further insulating the company from the next minerals cyclical downturn”.
