Australia | Sep 14 2022
This story features ALS LIMITED. For more info SHARE ANALYSIS: ALQ
ALS Ltd has a bold plan to reduce its exposure to traditional commodity price cyclicality, which brokers believe is achievable in the longer term.
-ALS outlines five-year growth plan
-Priority to expand Life Sciences division
-Battery minerals to reduce Geochemistry cyclicality
-Still some shorter term risk
By Greg Peel
ALS Limited ((ALQ)) began life in 1974 as Australian Laboratory Services, providing mineral testing for miners and drillers. More recently the company expanded its services into industrial sectors, such as petrochemicals and water, and into Life Sciences, where testing is conducted on the likes of food an pharmaceuticals.
ALS is a global operation.
Because of the domination of the minerals testing business in the past, ALS has always been perceived by the market as a cyclical stock – beholden to the ups and downs of commodity prices and subsequent exploration investment and testing demand. But through organic growth and acquisitions, the Life Sciences division now represents some 45% of earnings.
Life Sciences is seen as less cyclical, as opposed to Geochemistry (minerals and industrial). To that end it has been the company’s ambition to increase its market share of testing in this field to offset exposure to commodity price fluctuations.
At its investor day yesterday, ALS reiterated its five-year plan.
The company aims to grow revenues and earnings through to FY27 at a compound annual rate of 8%, which breaks down into organic growth of 6% (including 7% for Life Sciences) and acquisition growth of 3% (including 7% for Life Sciences).
Group margins above 19% are expected and cash conversion in excess of 90%. Targets imply 50% five-year revenue growth and 55% for earnings. Return on capital employed (ROCE) is to be greater than 20%.
Can they do it?
Brokers believe they can.
The priority is growth in Life Sciences, which management expects to grow at a rate well above the rest of the group. ALS will invest -$1bn in bolt-on acquisitions over the period, while organic growth will be supported by increasing regulatory demand around sustainability. M&A will specifically target food & pharma in which the company is currently underrepresented.
Management perceives growth above market given a currently low market share. But minerals will not be forgotten, where M&A will target new technologies and data analytics.
Importantly, brokers agree the company has the balance sheet capacity to pursue its goals. Gearing is low and cash flow is strong. But the bigger question is will ALS still be beholden to commodity market cyclicality?
The New Age
Management believes growth in global demand for decarbonisation and electricification will serve to reduce the cyclicality in its Geochemistry division, given implicit growth in demand for battery elements – lithium, cobalt, graphite, and also nickel – and also copper for EVs and other electrified items. Gold mining is also seen as less cyclical as while prices do fluctuate, demand does not.
Brokers agree the key to a re-rating for ALS over time is increased market confidence the company has indeed shaken off the cyclicality spectre that has long haunted it. The combination of growth in Life Sciences and the change in commodity mix for Geochemistry should help achieve this.
But it’s a longer term view.
After “thinking about this deeply,” Credit Suisse believes short term cyclicality remains a risk. With prices having come off highs for many traditional commodities, the broker cites prospect of an extended period of reduced capital raisings for junior miners and early signs of reduced exploration activity, potentially reducing margins.
Put simply, Credit Suisse sees upside risk if ALS can reduce cyclicality and downside risk if not. On that basis, and with the share price having risen towards its target price, the broker pulls back to Neutral from Outperform.
UBS agrees that having rallied in the three week’s post-AGM, the stock is now adequately pricing in both Geochemistry and Life Sciences demand. UBS retains Neutral.
The investor day presentation supports Macquarie’s view that ALS is a high-quality company with attractive margins and returns through the cycle and is a structural winner in a post-COVID world requiring more testing, regulation and compliance.
Macquarie rates the stock Outperform alongside a price target of $13.60.
Jarden, too, is optimistic. While the market debate about shifts in cyclicality for the Geochemistry business will take time to resolve, in the meantime Jarden believes the company has more than adequate balance sheet and free cash flow capacity to support acquisitive growth for the Life Sciences business. Jarden retains Overweight.
Jarden is not an FNArena database broker. Of the six database brokers covering ALS, only three (noted above) have to date updated for the investor day. Between them, they have two Buy or equivalent ratings and four Holds. The consensus target is $13.44 on a range from $12.60 (Credit Suisse) to $15.00 (Morgans), suggesting 16%-plus upside.
Jarden has a target of $13.00.
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