ALS Limited: AGM updates: Firing on all cylinders

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

24 August 2022, 7:30 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• 1H23 NPAT guidance issued at ALS Limited’s (ASX:ALQ) AGM was well above expectations.
• Similarly, 2027 Financial targets within ALS’ refreshed 5-year plan were well ahead of consensus/Morgans expectations.
• We adjust our short and long-term forecasts to recognize these updates.
• Our blended valuation adjusts to (login to view). Maintain Add.

1H23 Guidance beats short term expectations

ALQ is guiding to 1H23 underlying NPAT of $157-162m. This was a strong 12% ahead of our prior forecast and we infer 6% above Factset consensus.

ALS appears to be firing on all cylinders. We suspect both Geochem volumes and pricing have been better than expected. We also suspect the ability for significant additional capacity acquired via MinAnalytical (Dec-21) to take volumes through ALQ’s hub and spoke model, is a likely source of surprise strength.

Guidance also implies strong double-digit organic growth in Life Sciences (FY22 14%), where contributions from recent acquisitions (e.g. Nuvisan) are possibly better than expected.

FX moves are a likely tailwind (~2% benefit half-on-half) but overall we have under-estimated the pace of the post-COVID recovery in volumes, where operating leverage helps to contain unit costs. We also infer ALS has been more successful than expected in lifting prices in a broader inflationary environment.

5-Year plan/ targets ahead of expectations

ALS’ 2027 Revenue target of $3.3bn is 12%/19% of Consensus/ Morgans prior forecast, and the EBIT target of $600m is 16%/25% ahead. Targeted Life Sciences revenue CAGR of 14% is double our prior assumption, and the targeted group EBIT margin of +19% is 170bps better than our prior forecast.

Stronger than expected system/organic growth in Life Sciences is the major driver of the differential in ALS targets versus consensus. We also think acquisitions above our forecast ($70-100m p.a) is a secondary driver.

There appears to be no major changes to form of ALS’ growth strategy, with a focus on Life Sciences investment/ growth, and incremental technology investment to consolidate the market leading position in Geochemistry.

We expect ALQ to continue to pursue its complimentary “bolt-on” acquisition strategy with a focus on complimentary services and geographies. We expect an ongoing focus on higher margin food/ pharma and personal care acquisitions to help protect group margins once the current commodity cycle fades.

Forecast and valuation update

We upgrade our short-term assumptions around volume and price to better reflect 1H guidance (impacting our multiples valuation).

We upgrade our longer-term organic growth assumptions in Life Sciences (+11% CAGR to 2027) and the contribution from acquisitions (impacting our DCF valuation). Our 2027 EBIT forecasts still sit conservatively (~12%) below ALS’ targets.

Upgrading our blended valuation to (login to view) on higher FY23 earnings, and from a higher DCF.

Investment view

ALS presents a considered, well-organized approach in targeting its medium-term growth strategy. Its targets should drive upward revisions to market valuations/ expectations. The notion that margins are close to their peak in Geochem may be a deterrent for marginal investors.

However, we think the structural drivers in Life Sciences are too compelling to ignore, providing several years of above-trend growth. ALQ looks cheap trading on ~18.5x FY23 PE, below offshore TIC peers trading on 19-23x. Maintain Add.

Price catalysts

• Ongoing resilience in commodity prices and activity.

Risks

• Commodities correction/ shock.
• Escalation of inflationary headwinds (labour, costs).

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