ALS: Solid outlook for essential services

Author name:: By Tom Sartor
Job title:: Senior Analyst
Date posted:: 15 November 2022, 7:00 AM
Sectors Covered:: Junior (Emerging) Resources, Bulk Materials

Strong 1H23 underlying NPAT beat guidance and consensus by ~3%.
Commodities was the star, although momentum appears to be levelling out.
We think FY23 guidance looks conservative and implies a contraction in Commodities margins/activity.
ALS Ltd (ASX:ALQ) calls out geographic risks (geopolitics, energy) but further intended price rises suggest underlying demand for ALQ’s essential services remains resilient.
Our blended valuation adjusts to (login to view). Maintain Add rating.

Strong 1H23 result

Underlying NPAT ($164m) was 3% above both guidance and Virtual Alpha consensus. FX had only a modest (0.6%) impact, with several small acquisitions also making contributions.

The 20.3cps dividend beat our expectations but is unfranked due to lower tax payments linked to Australian instant asset write offs.

Key result takeaways

Guidance in line: Guided FY23 NPAT ($300-320m) was in line with our prior forecast despite the 1H beat. We think guidance looks conservative, implying a +100bps contraction in Commodities margins despite resilient operating commentary. Volatile FX moves do complicate current forecasts.

Commodities levelling out: 27% organic revenue growth was a standout, driven by both higher volumes and pricing, with 31% margins beating our forecasts (30.2%). While Geochem volumes are flattening, ALQ reports high enquiry levels and expects to push further 2H price rises, suggesting this cycle is levelling out rather than rolling over.

Life Sciences steady: Flat margins are being challenged by a softer macro, geopolitics and dilution from acquisitions including a drag from Nuvisan exposed to European weakness/uncertainty. Despite this, margins at 17% aren’t dramatic, and ALQ points to 2H improvement on offsetting initiatives (e.g. procurement) and resilient demand for essential TIC service as was proven through the pandemic.

Offsetting forces: Macro forces and geopolitics pose ongoing risks; however, ALQ’s confidence in a resilient outlook is supported by: 1) evidence of an easing in labour availability/cost pressures; 2) inclusion of inflationary clauses into all contracts; and 3) the high-end (60%) payout ratio for the 1H dividend.

Forecast and valuation update

Our group FY23-25 NPAT forecasts adjust only slightly, but this masks offsetting 3- 6% EBIT upgrades in Commodities, and 4-5% EBIT downgrades in Life Sciences.

We downgrade our blended valuation to (login to view) as we ascribe a lower multiple to Commodities earnings within our multiples-based valuation, on evidence of a plateau in cyclical activity levels.

Investment view

Marginal investors may question whether this is as good as it gets in Geochem. However, we think commodities activity can glide at elevated levels, as opposed to rolling over. We think this commodities price cycle also looks different given:

Severe supply constraints.
Structural “green/energy metals” demand.
Tailwinds from expected USD weakness.

Structural drivers in Life Sciences also look too compelling to ignore, providing several years of above-trend growth. Our current forecasts also conservatively sit 7% lower on revenue and 13% lower on EBIT versus ALQ’s 2027 5-year plan.

ALQ looks cheap trading on ~18.6x FY23F PE, below offshore TIC peers trading on 19-25x (average 21.4x). Maintain Add rating.

Price catalysts

Resilience in commodity prices and Resource sector activity.
Commodity momentum from USD weakness and/or global stimulus.

Risks

Softer activity/demand due to macro-economic or geopolitical forces.
Commodities correction/shock.

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