Transitory Headwinds For ALS

This story features ALS LIMITED. For more info SHARE ANALYSIS: ALQ

Weakness in Mineral Services forced ALS Ltd to downgrade its profit forecast despite a resilient Life Sciences division, but brokers see the issue as transitory.

-ALS Ltd’s first half profit guided to be down -5%
-Volatility in commodities markets, strength in Life Sciences
-Interest expense weighing
-Analysts remain positive

By Greg Peel

ALS Ltd’s ((ALQ)) operations can be divided into two segments: Mineral Services and Life Sciences. The former offers minerals testing and geochemistry for new mining projects while the latter covers environmental services, food testing and pharmaceutical and personal product testing.

Mineral Services revenues are highly reliant on the global exploration cycle, which in the first half of FY25 (ALS has a March-end financial year) has been weak.

Australian volumes have fallen -10% year on year due to extended delays in clients raising capital before starting exploration on local projects, Ord Minnett notes. There has been sluggish investment in some Latin American countries due to political volatility. In general, weaker demand from China, the world’s largest commodity consumer, is proving a drag, noting prior to the current commodities rally, copper prices had fallen -15% post May.

In better news, demand in North America is growing and Africa is strong.

ALS’ guidance anticipates first half earnings to be “slightly ahead” of a year ago, supported by a resilient Life Sciences business, but net profit to be down -5%.

Where there’s Life

Life Sciences saw its environment operations enjoying double-digit growth in revenue in all geographic segments, with the division as a whole trading to plan.

Environmental is the bright spot, Macquarie suggests, seeing low double-digit organic revenue growth in the first half, which is an acceleration from 8.6% last year. Environmental is the largest part of Life Sciences at around 55-60% of revenue. The integration of recent acquisitions is on track and Nuvisan is beginning to see improvement in its business development pipeline.

Margins in these businesses should reach the average of the Life Sciences division within five years, Goldman Sachs suggests, with a return on capital employed equal to or greater than 15%.

However, new acquisitions have also provided for greater interest expense than assumed, now at -$80m-plus when the market had estimated -$67m. This has been driven by increased debt levels that were themselves a result of unexpectedly high lease costs from some acquisitions and higher working capital requirements.

That interest expense is behind the forecast -5% fall in first half profit.

Transitory

In Jarden’s view, some of the elements of the weaker operating earnings should prove transitory, especially the impact of de-leverage from lower commodities volumes which has been driven by delays in right-sizing the company’s cost base, the broker believes.

Mineral Services should be able to adjust to more volume volatility in the second half following a volatile first half, Jarden suggests. Interestingly, pricing and mix remain constructive and according to management the company is maintaining market share, potentially implying some competitive rationality in a declining market.

Volatility has proven unhelpful to ALS’ typical ability to adapt its operating costs to the volume environment, driving a forecast earnings margin contraction of around -120bps in the Mineral Services business in the first half, based on Jarden’s forecasts.

The broker expects the company will now address its cost base and boost its “hub” utilisation, insulating earnings margins from potential ongoing volatility in the testing market over the second half.

Macquarie expects the exploration cycle to show recovery in 2025 after two down-years supported by a US$2,500/oz gold price, a better copper price and gradually improving economic activity, and thus sentiment, post central bank rate cuts.

Macquarie believes ALS remains well-placed to benefit from exploration recovery and structural tailwinds, increased environmental regulation and increased PFAS testing.

Forever chemicals are drawing a lot of attention at present.

UBS notes the stock trading at a one-year forward enterprise value to earnings ratio of 10x, below the 12x that the stock typically trades at during exploration upcycles. This broker’s positive thesis is underpinned by the view that record gold prices should support a recovery in exploration activity into FY26, despite challenging conditions at present.

Heading into the company’s first half update, six brokers covering ALS all had Buy or equivalent ratings on the stock. Heading out, that hasn’t changed. 

Ord Minnett maintains its Accumulate recommendation citing ALS’ exposure to an eventual rebound in commodity volumes as the global economy strengthens, and upside in the Life Sciences operations.

The macro picture is mixed, notes Goldman Sachs, though gold/copper prices and mid-long-term battery metal demand remain supportive. Goldman retains Buy.

Macquarie suggests FY25 was always going to be something of a transition year with higher interest and corporate costs and acquisitions proving earnings per share dilutive. ALS will provide further colour on the full year at the first half result release scheduled for November 19.

In response to the update, all brokers have trimmed down their earnings forecasts, leading to falls in target prices.

Macquarie (Outperform) has cut to $15.00 from $16.15, UBS (Buy) to $16.30 from $17.00 and Ord Minnett (Accumulate) to $14.90 from $15.10. Morgans (add) last had a target of $15.50, which provides a consensus target among brokers monitored daily by FNArena of $15.43.

Jarden (Overweight) has cut its target to $14.20 from $14.90 and Goldman Sachs (Buy) by -5% to $14.85.

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