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Upgrades Reflect Cost Control at ALS

Australia | Mar 31 2023

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

Consensus upgrades could accompany ALS’s eventual full year results, with the company issuing upgrades to forecasts on positive cost control. 

-ALS upgrades full year forecasts, but delivering on expectations likely key to improving confidence
-Outlook for commodities market has improved, with analysts anticipating double digit growth over the second half

By Danielle Austin

Following an upgrade to full year guidance by ALS Ltd ((ALQ)), Jarden has questioned whether the move will be enough to restore investor confidence in the stock. 

The company claims through effective pricing and cost discipline it has been able to manage economic headwinds, and particularly labour cost inflation. The company has lifted full year net profit guidance to $312-322m, an increase from the previous $310-320m range, 

The company, which describes itself as a global leader in laboratory testing, inspection, certification and verification solutions, is a diversified testing services provider that delivers services across geochemistry, life sciences and food & beverage. 

The commodities testing market, says Jarden, should see double digit top line growth through the remainder of 2023. According to the broker, this positive market outlook is yet to be fully reflected in consensus forecasts for the current and coming fiscal years. Jarden does, however, see management commentary at the full year result to have potential to drive upgrades to these forecasts. 

Pricing has remained firm across ALS’s key commodities and markets and Jarden anticipates a further 6.0% price growth over the second half, alongside sampling volume growth of 2.5%.

Life sciences shows resilience in the face of margin pressures 

Also finding the outlook for the commodities market to have improved in recent months, the guidance uplift has encouraged Macquarie (Outperform, target price $13.60) to similarly lift its forecasts, with the broker highlighting ALS has been consistent in delivered at the top end of guidance, or above, since FY19. This broker expects the improved outlook to correlate with a ramp up in sample flows in the coming fiscal year, and expects the company can emerge a beneficiary of a structural shift towards increased testing, regulation, and compliance.

Macquarie also reiterated that ALS expects it can improve margins and earnings in its life sciences business through capturing price improvements to better recover creeping costs. While recent results from life sciences businesses have suggested margin pressure, particularly stemming from labour cost inflation, ALS appears focused on margins and cost-price discipline within its life sciences operations, and Macquarie sees resilience in this segment of the company. 

Ord Minnett, having recently downgraded to a Sell rating on the stock (target price $8.40), highlighted that cost outlays by the company in a bid to establish a global operations and laboratories network during the resources boom has left ALS unable to meet its cost of capital with earnings. 

Despite this, this broker considers ALS a strong brand, with scalability across markets and strong relationships with large clients that offer competitive advantages. Ord Minnett sees ALS as being able to further strengthen this position by leveraging its brand and knowledge across markets.

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