The news wasn’t encouraging yesterday for shareholders in Brisbane-based testing giant, ALS (ALQ), which only a month and a bit ago rejected an unwanted $2.7 billion takeover approach.
ALS management and chair told yesterday’s annual meeting in Brisbane that the long fall in earnings are yet to bottom as the downturn in the resources sector spending shows no sign of easing.
As a result, the underlying net profit for the September half year will fall by a further 20% (on present indications) as weak demand from the oil and gas sector offsets growth in the food, environmental and pharmacy sectors. The news is contrary to the outlook given when the annual figures were released at the end of May which suggested the fall in earnings had slowed.
The update saw the company’s shares sold down and they fell 2.3% to $5.09, which valued the company at $2.57 billion, a discount to the rejected private equity offer.
“First-half underlying after-tax profit [is expected] to be in the range of $50 to $55 million, compared with $61.9 million in the first half last year," incoming chairman Bruce Phillips told the meeting.
The drag on earnings is a loss of $14 million expected from its oil and gas division as the fall in revenues run ahead of cost cutting. The half-year loss is worse on an annualised basis than the $17 million this division lost in the 2015-6 financial year.
Even so, ALS reckons this division will post a small profit in the December quarter with a further improvement in the final quarter.
"However the market remains uncertain and we do have contingency plans should the oil price fall below expectations," managing director Greg Kilmister told the meeting.
Investors are also upset the company cut its dividends to conserve cash. ALS will now pay between 50-60% of underlying earnings, down from the traditional 70%.
"The payout ratios in terms of underlying net profit in FY2015 and FY2016 were 62% and 61% respectively, in two of the most difficult trading years the Company has experienced. This is down from previous levels where ALS had traditionally paid out approximately 70% of profits," Mr Phillips told the meeting.
“At these payout levels, it means the majority of the funding for the growth of the Company over the past ten years has come from divesting non-core assets, equity raisings, or of course borrowings.
"The Board needs to manage the Company’s capital resources, including annual profits, efficiently and prudently to drive the best total shareholder return over the medium to long term. The Board is also conscious of providing investors with a degree of certainty regarding dividends by minimising fluctuations in the payout ratio.
"In balancing these considerations, it is therefore likely the Company’s future dividend payout ratio will be in the range of 50% to 60% of underlying net profit as we move through the resources cycles. This will enable greater reinvestment of capital in growth initiatives,” he said.
ALQ has joined the likes of the ANZ Bank, BHP Billiton and Rio Tinto, among others, in cutting dividend payouts to conserve cash, and if earnings fall further anther reduction would not surprise.
Private equity groups Bain Capital and Advent International outlined an “indicative” and non-binding takeover of $2.7 billion for the company, or $5.30 a share, which the company immediately rejected as “opportunistic".
The CEO told the meeting the company has $200 million in cash to fund acquisitions and it is targeting purchases in the life sciences sector. Mr Kilmister told the meeting the company is "very mindful of not overpaying for assets simply to be successful in the acquisition process". In particular, this comes after it paid $579 million for a company in the oil and gas sector, which resulted in subsequent heavy write-offs.
In fact the total investment was written down in late 2015 as the company raised more than $300 million from shareholders. Most of that raising remains on the balance sheet in that cash pile.
