Leaving the pandemic behind and riding a stronger commodity cycle has helped ALS to deliver a well-flagged high quality interim profit result.
ALQ reported an underlying net profit of $127.1 million, an increase of 57.7% over the same period last year and slightly ahead of its guidance ($115-125m).
The Life Sciences division made the most of volume growth and improved efficiency to lift revenue by 19% and with a small FX headwind of -2.4%. The Nuvisan acquisition (49%) was completed in October 2021 and will make a full contribution to 2H22f. ALQ has an option to acquire the remaining 51% of Nuvisan between January 2024 and September 2026 on 13x trailing 12-month EBITDA. Nuvisan had lost a major client prior to the acquisition but ALQ says it has made good progress to replace the revenue which will be lost over time as the contract runs out.
The Commodities divisions also benefited from recovering volume growth. Geochemistry sample volume climbed 46% as higher commodity prices encouraged mining companies to get busy. Amongst the big drilling companies around the world, Boart Longyear 3Q revenue increased 37% year-on-year while West African based driller Capital Drilling saw 3Q revenue jump 75% year-on-year. Also in West Africa, Geodrill’s revenue increased 44% year-on-year.
The increased activity helped to offset the negative effects of supply chain disruptions, labour market and capacity constraints.
ALQ’s EBITDA cash conversion was a commendable 85% in a typically seasonally softer part of the year, driven by an on-going focus on working capital. ALQ’s balance sheet remains healthy with a leverage ratio at 1.5x and gearing of 37%. The company has undrawn bank facilities of $647 million in total liquidity of approximately $720 million.
ALQ’s guidance for underlying net profit in FY22f is $242-252 million, supported mainly from the strong Life Sciences division and a 15% capacity increase in geochemistry in the Commodities division. The Board has elected not to renew the share buyback program preferring to focus on investment in organic opportunities and potential acquisitions, primarily in food and pharmaceutical markets.
Investment view
ALQ’s drivers are a multi-year minerals upcycle, new business opportunities and an on-going normalisation of the operating environment. If capex decisions by miners were to change, this would impact earnings growth, as would any downturn in testing volumes generally. ALQ continues to trade at a ~20% PE ratio discount to its international peers based on consensus forecasts out to FY24f. Although we retain our Hold recommendation, we see potential for positive news catalysts to support the share price.
