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Morningstar | No-Moat ALS Limited’s FVE Increased to AUD 4.50 on Stronger Commodities Outlook

Adjusted fiscal 2019 NPAT increased by 29% to AUD 161 million, below our AUD 177 million forecast. Despite this, we increase our fair value estimate for no-moat ALS Limited by 17% to AUD 4.50, in consideration of a stronger near-term commodity price outlook and time value of money. Higher commodity prices can be expected to be accompanied by attendant positives for servicing of mining companies, in particular benefiting ALS’ Commodities segment via geochemistry sample flows.

Our fair value estimate equates to a little changed fiscal 2024 EV/EBITDA of 7.2, P/E of 12.3, and dividend yield of 4.9%. But we now forecast group five-year EBITDA CAGR of 6.2% to AUD 449 million by fiscal 2024, versus our prior target of AUD 380 million. This includes strong 7.9% growth for life sciences, and 7.8% growth for industrial including tribology, but more modest 2.0% growth for commodities. The largest change is in commodities where we’d previously forecast negative EBITDA CAGR. Our group midcycle EBITDA margin assumption increases to 21.5% from 20.9%, crediting increased revenue from ALS’ highest-margin commodities segment. This is somewhat ahead of fiscal 2019’s 19.9% actual.

At AUD 7.60, ALS shares remain substantially overvalued. We think that price implies a market factoring-in five-year group EBITDA CAGR approaching 15% at a near-30% midcycle EBITDA margin. This quantum of EBITDA CAGR and more was regularly achieved by ALS Limited during the halcyon days of the China resources boom. The market obviously feels there is pedigree upon which to anchor. But we think it will be more difficult to replicate historical growth rates on a far larger earnings base, and from life sciences rather than geochemistry. ALS has capable competition in life sciences from the likes of majors such as Bureau Veritas, SGS, and Intertek. Life sciences comprises 50% of fiscal 2019 EBITDA and 50% of our fair value estimate.

Net operating cash flow increased 18% to AUD 219 million, broadly in line with expectations. But increased capital expenditure of over AUD 170 million, in conjunction with dividend payments and an ongoing buy-back program, increased net debt by 17% to AUD 593 million. Net debt/EBITDA of 1.9 is elevated but not excessive and we forecast favourable decline to a comfortable sub-1.0 by fiscal 2023. That is unless buybacks extend. ALS has bought back more than AUD 130 million of stock over the past 18 months removing 24.6 million shares but only 3.8% of issued capital. It will extend the buyback for 12 months to a total AUD 225 million. We continue to see this as a less than ideal use of capital given the share price premium/fair value. The average buy-back price to date is AUD 5.30. We think the better tac is to pare back debt, given the still-cyclical nature of the business.

ALS paid a final AUD 11.5 cent dividend bringing the full fiscal year total to AUD 22.5 cents, marginally ahead of expectations for a 3.0% part-franked yield at the current AUD 7.60 share price. We increase our fiscal 2020 EPS forecast by 7% to AUD 0.40 and commensurately increase DPS to AUD 24 cents though for a still middling 3.2% yield assuming a 60% payout.

Most of the earnings growth came via commodities where segment revenue increased 20% to AUD 620 million on an improved adjusted EBITDA margin of 29.1% from 27.4%. Geochemistry and metallurgical volumes improved with buoyant commodity prices. Growth in capital expenditure from miners is expected to continue from a low base following a period of under-investment. But the life sciences and industrial segments also enjoyed higher revenues and in the case of life sciences improved margin. Environmental and food & pharma testing delivered 19.5% revenue growth with increases in all regions. The strategy remains expansion via targeted acquisitions and investment. The smaller Industrial segment including asset care and tribology experienced 9.7% revenue growth, but margins suffered a change in project mix and price pressure in Australia.

Our adjusted fiscal 2019 NPAT figure excludes AUD 9.9 million in divestment and impairment charges, but includes AUD 17.6 million in restructuring costs, AUD 3.0 million in amortisation and AUD 4.4 million in losses from discontinued operations. ALS’ AUD 181 million underlying fiscal 2019 NPAT figure excludes the latter three, but we think they’re sufficiently recurring under the business model to justify capture.