Most results were thereabouts against expectations which saw the sector perform broadly in line with the index (All Ords flat since 1 August vs mining services -2%). Exploration activity remains soft despite positive macro-trends, though we expect market volatility to weigh on junior miner raisings in the near term. The development pipeline is experiencing wobbles given lithium project cancellations but still has breadth and depth in gold, iron ore, gas and wind. Production was varied with strength in bulks (though weakness in iron ore price presents a risk to high-cost projects) and continued softness in battery metals (lithium and nickel). Top picks are ALQ (multi-year margin recovery in Life Sciences will be supplemented by an eventual cyclical volume recovery in Commodities) and CVL (too cheap with strong cash generation and multi-faceted growth potential).
ALS Limited (ALQ)
ALQ looks poised to benefit from margin recovery in Life Sciences as well as a cyclical volume recovery in Commodities. Timing around the latter is less certain though our analysis indicates we may not be too far away (3- 12 months). In addition, commodity prices are supportive with both gold & copper around all-time highs at US$2650/oz & US$4.50/lb respectively.
Investment view:
ALQ is the dominant global leader in geochemistry testing (~50% market share), which is highly cash generative and is little chance of being competed away for a variety of reasons. The excess capital from Commodities is used to fund capital driven earnings growth in Life Sciences.
Civmec (CVL)
CVL reported a strong FY24 with EBITDA +11% YoY and NPAT +12% YoY. Although some large projects roll off in FY25, management sounded a confident tone that it could continue to deliver revenue and earnings growth, albeit at more modest rates. Margins in FY25 will serve to benefit YoY from the re-domicile costs ($1m) and additional overheads ($2-3m) which were carried in FY24, as well as potentially conservative margin recognition in 4Q24. The valuation is compelling at 5x FY25 EBIT and 15% FCF yield, which undervalues a business of CVL’s quality.
Investment view:
CVL is a founder-led engineering & construction business with leading margins (EBIT ~10%), high ROE (~15%), best-in-class facilities, a robust balance sheet (net cash), a history of strong cash flows (conversion >100%) and multi-faceted growth potential.
The stock is trading on attractive valuation metrics at ~5x FY25 EBIT and 11-15% FCF yield in FY25-27. This undervalues a business of CVL’s quality, however, a discount exists due to liquidity constraints.
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