Treasure Chest: Time To Buy ALS?

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

By Greg Peel

ALS Ltd ((ALQ)) is inexorably a member of the beaten-down mining services sector. The minerals tester has seen earnings decline for two straight years, beginning at the peak of the mining investment boom and accelerated by falling commodity prices and subsequent curtailment of exploration and development in the mining and energy industries thereafter. But is the worst now over?

At its quarterly update earlier this month, ALS announced a $290m write-down of its oil & gas businesses. Mining investment has long since peaked but the boom in energy investment is now approaching and the lower oil price has put the lid on new developments. The write-down does not bode well, given energy development is only now rolling over. ALS’ major exposure is to North America where production is being rapidly curtailed.

The company’s minerals testing business has now long been in the doldrums, and there yet remains little sign of life.

But it does now appear this business has troughed for ALS and is unlikely to get any worse from here. Some stability has returned to commodity prices but at this stage, there’s no indication minerals testing demand is about to recover. Oil & gas may not yet have seen the worse but as ALS’ traditional businesses have declined in value, the company has shifted focus into new businesses.

Life Sciences is now the company’s largest division. Activities in this field include government-regulated environmental testing, which offers stable earnings, pharmaceutical testing, which is also a stable market, and food testing, which is now fast-growing. Deutsche Bank forecasts Life Sciences will provide 41% of ALS’ earnings in FY15, and notes that geographically, the US is the company’s fastest growing Life Sciences consumer at a current 35% of revenue.

This week ALS’ rival in US Life Sciences, Eurofins, posted 29% year on year revenue growth in the March quarter. The read-through to ALS’ revenues is positive, although Deutsche does note Eurofins also enjoyed strong growth in Asia-Pacific, which might imply taking some share from ALS.

At ALS’ quarterly update, the write-down did rather overshadow the fact the company’s quarterly earnings result came in ahead of consensus forecasts. UBS upgraded its rating on the stock to Neutral from Sell at the time. Morgans retained Hold, but declared a growing confidence that profits have now hit a trough and improvement is on the horizon. JP Morgan, Morgan Stanley (both Hold or equivalent) and Macquarie (Underperform) remained concerned there could still be some further downside for oil & gas.

Deutsche Bank initially hung onto a Hold rating, meaning that at the time of its quarterly report release ALS could not attract one Buy rating amongst FNArena database brokers. But now Deutsche Bank has become more optimistic that a trough has indeed been seen, and that it's time to value the company on through-the-cycle potential rather than on the basis of immediate lingering headwinds.

With minerals testing having apparently stabilised, Deutsche cites upside for Life Sciences as the reason to be optimistic beyond uncertain oil & gas exposure. On a through-the-cycle basis the broker forecasts a compound annual earnings growth rate of 13% in FY15-18, an FY16 yield of 3.7% and a total shareholder return of 20%.

The broker has subsequently upgraded to Buy, lifting its price target to $6.96 from a prior $4.00. This compares to a consensus database target of $5.60, which was $5.30 before Deutsche upgraded.

It is also worth noting that according to data collected by ASIC, ALS is among the most shorted stocks on the ASX, to the tune of 9.9% as of last week.
 

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