A distracted market has clearly not absorbed the positive messages emanating from ALS’s recent interim result.
The commodity cycle is improving leading to much stronger activity in the mining sector. Recent datapoints from major drilling companies reveals vigorous revenue growth and higher utilisation. This directly benefits ALQ’s Commodities division with volume growth and geochemistry sampling activity.
The Life Sciences division will gain a full contribution from the recent Nuvisan acquisition in 2H22f, backing up the underlying momentum of its own volume and efficiency gains.
We note that commentary from peer companies is consistently upbeat given the strong industry drivers and a higher growth outlook than pre COVID. There is a greater focus on end-to-end quality assurance by customers and this is expected to drive further investment into ATIC (assurance, testing, inspection, certification) in order to achieve higher quality, safety and sustainability standards. This is a theme that will benefit ALQ.
Although ALQ’s peers are much larger (average market capitalisation of almost US$18 billion compared to ALQ at US$4.2 billion) we do not view ALQ’s steep discount as being justified.
ALQ has a comparable, if not superior revenue growth profile and EBIT margins. ALQ’s balance sheet has less than 2x net debt to EBITDA gearing, similar to its peer group.
Consensus earnings forecasts are showing a 3-year compound EPS growth rate of 17.1% pa. This could be conservative if ALQ’s overweight exposure to minerals and geochemistry, together with its higher margins can deliver better growth than its peers.
Investment view
A multi-year minerals upcycle, new business opportunities and a more normal operating environment are the key drivers of ALQ’s outlook. Earnings risks stem from the same factors if capex from miners does not increase as expected, or if the market is impacted by other events such as a recurrence of COVID disruptions. The recent share price decline since the recent result is an opportunity to acquire the stock and we now upgrade our recommendation to a Buy.
