Rising Margins Boost ALS’ Favourable Outlook

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

Following first half results for ALS Ltd, brokers raise target prices largely due to rising margins in life sciences and an increasing market share in geochemistry.

-ALS Ltd’s first half profit exceeds the consensus forecast  
-Life Sciences: expanding margins, Commodities: rising market share
-Growth assured on achieving acquisition targets, says Morgans
-Upside from water testing services?

By Mark Woodruff

At face value, testing, inspection, certification, and verification services provider ALS Ltd’s ((ALQ)) first half profit of $152m declined by -4% on the year earlier, but that outcome was slightly ahead of management’s guidance for a -5% decline.

Equally important: it was better than what market consensus had penciled in too.

Commodities margins remained robust, notes Morgans, due to ongoing market share gains in geochemistry, while Life Sciences margins (excluding acquisitions) saw significant expansion.

In addition to a positive contribution from M&A integration, Jarden highlights Life Sciences benefited from strong organic growth.

Should current commodity prices remain stable and the recent momentum in junior miner raisings continues, Morgans anticipates significant upside to its outer-year forecasts, though Jarden stresses forecasting earnings for the Commodities segment remains challenging for both management and the market.

One of the world’s largest analytical and testing services companies, ALS partners across key sectors including mining, natural resources, environmental, food, pharmaceutical, industrial, and inspection services.

ALS has a global presence, operating from more than 350 sites across over 65 countries. In FY23, group revenue was split geographically as follows: Americas 40%, Asia Pacific 37%, EMENA region 21%, and Africa 2%.

The group reports results through the Commodities and Life Sciences segments which contributed 45% and 55% of FY23 group revenue, respectively.

Management reaffirmed guidance for mid-single-digit organic revenue growth, aligning with UBS’s FY25 forecast of 5%. This implies a much better second half lays ahead.

Life Sciences margin and forecasts

The first half margin for Life Sciences came in at 14.4% compared to Macquarie’s 13.6% forecast.

Environmental, the largest contributor to the segment at 55-60% of revenue, is seen as the standout in first half results, delivering 12% organic revenue growth alongside a 137bps margin increase.

This performance included contributions from acquisitions and efficiency gains from the advanced Laboratory Information Management System (LIMS) implemented by management.

Nuvisan, acquired in March, resides within the Life Sciences division and has returned to profitability, aiding earnings momentum in the second half, observes Jarden. Management’s transformation program for Nuvisan is ahead of schedule, having achieved -EUR$13m in cost savings for the half.

UBS forecasts FY25 EBIT growth of 16% for Life Sciences, driven by 10% core growth and contributions from Nuvisan, Wessling Holding GmbH & Co, and York Analytical Laboratories.

The Wessling acquisition, completed in early June, provides environmental, food, and pharmaceutical testing services across 22 European locations and is performing slightly ahead of plan.

The York transaction, effective April 1, expanded ALS into the Northeast US environmental testing market and is meeting expectations for earnings improvement and mid-to-high single-digit revenue growth.

Morgans sees a clear path for growth if management delivers on acquisition turnaround targets over the next five years, with solid demand fundamentals expected to support a 40bps margin expansion to 16.8%, consistent with company guidance for “solid improvement.”

Certainly, Macquarie remains confident in management’s acquisition execution, with Nuvisan profitable, Wessling outperforming expectations, and York delivering as anticipated.

The Commodities segment

The Commodities segment delivered first-half earnings of $151m, achieving a margin of 28.2%.

The Metallurgy division within Commodities reported a -16% organic revenue decline compared to the prior corresponding period, notes Macquarie, driven by a reduced number of brownfield projects and project deferrals, particularly in lithium and nickel.

Management highlighted a significant rise in junior financings in October, reaching the highest level in two and a half years, aligning with Macquarie’s recent analysis of capital raisings. A typical three-to-six-month lag is expected before ALS’ sample volumes reflect the impact.

While this uptick in activity is encouraging, it will need to be sustained to positively impact, notes Macquarie.

PFAS upside?

ALS may benefit from heightened awareness of a pressing global issue.

Recent media reports noting PFAS (Per- and Polyfluoroalkyl Substances), or “forever chemicals,” in Australian drinking water at levels deemed unsafe in the US have drawn attention to PFAS contamination, as noted by Jarden.

For a more detailed explanation of this topic please refer to https://fnarena.com/index.php/2024/11/21/esg-focus-the-little-big-things-21-11-2024/

ALS is positioned to capitalise on this issue via growing demand for water testing services, suggests the broker.

PFAS testing already represents around 5% of the Environmental segment, and Macquarie notes first-half organic revenue growth for PFAS testing exceeded 24%.

Outlook

For the medium-term, UBS expects a favourable regulatory environment, the turnaround of Nuvisan, and recent acquisitions should combine to provide an earnings tailwind.

Of the four brokers covering ALS Ltd monitored daily by FNArena, three have a Buy (or equivalent) rating while Ord Minnett (Accumulate) has not yet updated research for the first half result.

Including Ord Minnet’s $14.90 target, the average target in the database post ierim result increased to $16.35 from $15.43.

Outside of daily monitoring, Jarden raised its target to $14.40 from $14.25 and downgraded to Neutral from Overweight, citing limited near-term earnings catalysts.

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