ALS Limited keeps turning out A-grade homework, but the market keeps giving it no more than a C-plus. First half earnings were solidly at the top end of guidance as volume growth and some price increases set the tone for a full year guidance upgrade.
A first half revenue and margin beat from the Commodities division carried the group to an underlying net profit of $164.3 million, 29% ahead of last year. The Board shunted the unfranked dividend up by a similar margin to 20.3cps, a payout ratio just shy of 60%.
Commodities EBIT up 36%. Revenue growth of 31.3% (mostly organic) reflected the high demand for commodities testing services. Geochemistry organic revenue lifted 31% on sample volume growth of 17%. An increasing amount of mine site geochemistry testing is a key driver of growth for this segment. EBIT margin increased 111bp to 31.0%.
Life Sciences margin slipped. A mish-mash of geopolitical events and economic muddles caused the Life Sciences margin to slip to 17.0% despite a 16.9% increase in EBIT to $111.2 million on a 23.8% revenue growth outcome. The addition of several acquisitions has expanded the geographic reach in food and pharmaceuticals. ALQ’s balance sheet is capable of adding several more businesses that can add to these promising avenues of growth.
ALQ recently set out its new 5-year strategic plan which entails reaching annual revenue of $3.3 billion by FY27f and underlying EBIT of $600 million. Part of the growth will be by acquisition, but a substantial amount will be through organic strategy building on existing strength.
The result suggested ALQ has good visibility on near-term earnings, and this provided the confidence to lift FY23 guidance to $300-320 million net profit. That is a 17% increase at the mid-point.
Investment View
The stock continues to trade cheaply considering the 3-year 8.7% pa compound annual growth rate for consensus EPS. A combination of acquisition growth and trend shifts to outsourcing, technology development, greater regulation and digitisation will support the growth. ALQ is allocating approximately $1 billion to acquisitions across that period, including the remaining $300 million in early CY24 to acquire the outstanding 51% of Nuvisan.
ALQ remains a buy recommendation and just needs a little more attention from the market to unearth its potential.
Risks To Investment View
Growth in commodity companies’ exploration may not be as robust and enduring as expected. Changes to regulations in testing may affect growth in volumes.
Recommendation
We have retained our Buy recommendation.
Figure 1: 1H23 RESULT
