ALQ has been treading water as a range of factors suppress the performance of this company. The commodities divisions will see more fat on the bones as activity in gold/copper and battery metals companies lifts later in the year. The poorly performing Nuvisan pharmaceuticals business needs ALQ to step in and acquire the balance to get it moving.
A temporary softness in junior miner activity, constrained by financing, is affecting the flow of geochemistry samples. We see increasing activity from gold/copper miners and particularly from companies mining battery materials will underpin growth heading into 2H24. The latter already represents about 40% of ALQ’s sample flow mix while copper activity needs to respond to the same underlying demand trend. ALQ could extract low double-digit pricing growth in geochemistry revenue across FY24.
A slew of ALQ peers have been reporting solid organic revenue growth prompting upgraded earnings guidance. While ALQ’s 1H24 guidance update did not reflect the same exuberance, it was only focused on the first half year and does not capture the likely second half skew of earnings. This is contributing to the 20% PE discount to its peers with ALQ trading at ~17x FY24f EPS.
The Nuvisan (ALQ 49%) business (pharmaceutical contract research) has disappointed investors so far, but ALQ can turn this around when its opportunity to acquire the balance of the company (approx. $300m) arises later this year. Taking control of the business will enable ALQ to lift Nuvisan’s performance and contribution.
Investment View
Minerals drillers remain upbeat on their CY23 outlook and capital spending in the industry is set to increase. As the next point in that food chain, ALQ’s Commodities business not only picks up the volume benefit but also has pricing power to drive revenue growth. The Life Sciences business has similar traits and as regulatory and digitisation pervades the pharmaceutical industry, ALQ as a provider of key services can benefit.
ALQ still has balance sheet capacity to make further acquisitions (up to $1bn) as part of its 5-year strategic plan to achieve revenue of $3.3bn by FY27 and underlying EBIT of $600m. These are goals, not guidance, but ALQ can plausibly turn this into reality, in our view.
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.
