ASL Ltd: Tracking ahead of expectations

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
30 July 2020, 10:30 AM
Sectors Covered:
Resources, Metals

  • The lack of 1H21 guidance at the AGM was a surprise, however the 1Q trading update does imply ALQ is tracking comfortably ahead of expectations.
  • Our upgraded forecasts assume ALQ recovers earnings back to FY20 levels within 2 years.
  • ALQ offers clear value looking through the FY21 dip, leveraged into compelling TIC (testing) fundamentals, including new COVID related markets in development.
  • Our blended valuation is based on FY22 forecasts and adjusts (Morgans clients can login to view detailed reports and price targets) supporting our Add recommendation.

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No 1H21 guidance…

The lack of 1H21 guidance at the AGM surprised us relative to clear resilience on display in the 1Q trading commentary.

There are clearly several unknowns in play (wave 1 and 2 outbreaks, pending economic impacts) but we also note ALQ’s conservative approach to guidance in recent years (guidance usually met/exceeded).

…But clearly trading ahead of expectations

1Q21 revenue was down 9.8% on the pcp (-13% ex M&A and FX) but ALQ commendably held group EBIT margins flat on the pcp (~17%) via pro-active capacity matching and cost reduction including sharp corporate cuts.

ALQ called out improvement by June in most jurisdictions/segments except in Latin America (COVID, social unrest) and Industrials (deferred maintenance activity), but overall remains cautiously “hopeful" that 1Q21 will mark the revenue low point.

Our prior 1H forecasts conservatively modelled both a 13% fall in 1H revenue and a 255bps hit to margins, and we infer the market was only slightly higher.

So assuming ALQ can at least maintain this trajectory into the 2Q, then today's update actually reflected an upgrade for the market, explaining price strength.

Modest upgrades to earnings and valuation

We have relaxed the conservatism applied to our forecasting of ALQ's 2H21 and FY22 earnings recovery, supporting 6-8% upgrades to forecast FY21-22 NPAT.

We now model 7.5% and 10% retractions in FY21 revenue and EBIT respectively (previously 9% and 16%) which we think forms a defendable base case.

We do forecast acceleration in the 2H (per the FY20 result outlook), and our forecasts imply that ALQ recovers back to FY20 profitability by FY22.

Our blended valuation adjusts (Morgans clients can login to view detailed reports and price targets).

Retain a positive view on medium-term value

We think our forecasts and valuation still look fair to conservative given ALQ's far better than expected trading through the pandemic so far.

We see further upside linked to:

  1. Recognition of ALQ's status as an essential services provider (minimal closures).
  2. Proven cost management through cyclical shocks.
  3. Solid base Commodities earnings underpinned by gold.
  4. Compelling structural trends in the TIC industry including new COVID related markets in development.
  5. ALQ's history of attracting a market premium as a higher quality industrial.

The stock looks relatively undemanding on FY22 metrics (20.9x FY22F PE vs global TIC peers pushing 25-30x) and we think it can keep running in-line with the re-opening of the global economy.

More information

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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