ALS: Firmly on the recovery trajectory

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
19 November 2020, 3:45 PM
Sectors Covered:
Resources, Metals

  • 1H21 underlying financials met the market’s expectations helped by thorough disclosure through COVID.
  • All indications suggest 1Q21 will mark the low-point in activity, with resilient margins and much stronger 2Q sample flows seen continuing into 2H21.
  • We forecast earnings to recover back to pre-COVID levels during 1H22, contingent on avoiding further hard lockdowns in key geographies.
  • Our blended valuation is based on our FY22 forecasts and adjusts, (login to view updated valuation) supporting our positive view.

1H financials in-line

1H21 underlying financials were in-line with market expectations with Life Sciences beating our expectations. COVID restructuring costs ($21m) were taken below the line, partly offset by Govt subsidies ($12m).

1H Revenue fell 9.4% vs the pcp excluding acquisitions (+$26m) and FX (-$19m). The 8.5cps ff dividend was set at the lower end of ALS Ltd's (ASX:ALQ) targeted payout range (51%) as ALQ prudently secures its solid balance sheet and available liquidity.

This supports ALS Ltd (ASX:ALQ) flagging it has re-engaged with its M&A pipeline.

Life sciences resilience and commodities leverage

The resilience of Life Sciences (Revenue -3.5%, margins up 10bps) was a highlight, protecting group EBIT margins at 16.1% (-114 bps vs the pcp). This again proves ALQ’s ability to quickly scale capacity (costs) through cyclical downturns/shocks via the hub and spoke model.

Geochem sample flows rebounded strongly in the 2Q and we think the combination of higher volumes (Sep samples +10% vs pcp), sector capital raising activity and expectations for commodity reflation can again attract a premium rating on this division, and market following for ALQ.

2H sample volume recovery on track

No formal guidance was issued but outlook comments support the strong 2Q recovery seen across all divisions continuing into the 3Q.

Expectations for better 2H margins are all volume drive into ALQ’s leveraged operating model, with pricing and mix drivers (Commodities) not anticipated until industry capacity is closer to full utilisation.

We have upgraded our FY21-22 forecasts slightly (Revenue 3-5%, EBIT 5%) in assuming ALQ reattains pre-COVID profitability in 1H22. The resumption of hard COVID lockdowns in key geographies (watching the US with interest) is the key risk to this scenario.

Maintaining a positive view

We adjust our blended valuation methodology slightly (p5) in adjusting our valuation (login to view updated valuation), looking forward to FY22 forecasts.

ALQ has recovered strongly, but still looks appealing here (~22.0x FY22 PE vs ~30x for global TIC peers ~30x). We rate the stock highly for:

  1. Earnings upside risk, in our view;
  2. Exposure to gold leverage and potential Commodities reflation;
  3. Its status as an essential services provider;
  4. Management’s experience in managing cyclical downturns;
  5. Compelling longer term structural trends in the TIC industry;
  6. ALQ’s history of attracting a market premium as a higher quality industrial.

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