ALS: Firmly on the recovery trajectory
About the author:
- 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
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
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.
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:
- Earnings upside risk, in our view;
- Exposure to gold leverage
and potential Commodities reflation;
- Its status as an essential services provider;
- Management’s experience in managing cyclical downturns;
- Compelling longer term
structural trends in the TIC industry;
- ALQ’s history of attracting a market premium
as a higher quality industrial.
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