Australia | Nov 26 2012
– ALS delivers solid interim result
– Slowdown in minerals exploration the main threat to earnings
– Brokers adjust forecasts and price targets
– Sell ratings continue to dominate
By Chris Shaw
ALS ((ALQ)), the former Campbell Brothers, delivered interim results on Friday and the result of $135.5 million in net profit after tax was at the mid-point of previous earnings guidance offered at the AGM in July.
The composition of the result was a little different to what Citi had expected, as while sales were a little below what had been forecast this was offset by better EBIT (earnings before interest and tax) margins at the group level.
The result was accompanied by updated full year earnings guidance, management indicating net profit after tax for FY13 should be in a range of $235-$255 million. The mid-point of this guidance is slightly below Citi's previous forecast of $249 million.
To reflect this the broker has made minor changes to its numbers, lowering FY13 earnings per share (EPS) estimates by 2% and forecasts for FY14 and beyond by around 4%. Others in the market have reacted similarly, JP Morgan cutting its EPS numbers by 5% this year and by 10% in FY14, while the likes of Deutsche Bank and Credit Suisse have increased FY13 forecasts slightly.
The major concerns stemming from the interim result in Deutsche's view are signs of slowing organic revenue in most divisions and the impact of a deteriorating minerals exploration market, as this is the key driver of earnings for ALS.
This trend may take some time to reverse, as from a peak in FY13 Goldman Sachs expects two years of earnings decline in FY14 and FY15 despite management at ALS indicating a recovery in the geochemical market in late 2013 is likely.
A positive identified by Morgan Stanley is that while the Minerals division remains the primary earnings driver for ALS, defensive revenues in other parts of the business have shown signs of growth. This has the capacity to mitigate some of the slowdown in the Minerals business in Morgan Stanley's view.
Citi also points out the combination of a strong balance sheet and strong cash flows means ALS is likely to look for acquisitions to continue delivering earnings growth. The interim result was an example, as while organic growth in 1H13 was around 15% relative to the previous corresponding period, growth from acquisitions was 12%.
Macquarie agrees, pointing out ALS remains focused on building a globally integrated food and pharmaceutical business and is willing to achieve this by acquisition assuming targets meet the financial requirements of management. As well, Macquarie notes the upstream oil and gas testing and inspection sector is attractive for ALS, though multiples in this sector are currently higher than in the food and pharmaceutical sectors.
The issue for Macquarie is valuation, as on the broker's numbers the stock is trading at an 11% premium to the market at present. For Macquarie this appears full given a declining earnings profile over the next 12 months and ongoing risk around earnings given the weakening outlook for global exploration.
This is enough for Macquarie to retain a Sell (Underperform) rating, which is the majority view of brokers in the FNArena database. The database shows ALS is rated as Buy twice, Hold twice and Sell four times. Goldman Sachs is not in the database and also rates ALS as Sell.
The consensus price target for ALS according to the FNArena database is $9.65, down from $9.86 prior to the interim result.
For Credit Suisse the earnings headwinds in place appear enough to limit the potential for any share price outperformance, while Deutsche sees the stock as fair value at current levels.
Morgan Stanley in contrast continues to rate ALS as Overweight within an In-Line industry view, seeing enough potential from acquisitions acting as an offset to a slowdown in the Minerals business and from growth in more defensive revenues as enough to justify maintaining a Buy rating on the stock.
Citi agrees, seeing value in relative terms as while the broker suggests ALS should trade at a discount to global peers given a higher commodity exposure, this discount is currently well above historical levels and so appears excessive.
Shares in ALS today are higher in a stronger overall market and as at 11.20am the stock was up 10c at $8.79. This compares to a range over the past year of $7.23 to $10.29, the current share price implying upside of around 10% relative to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
