Testing Positive

ALS Ltd is a mineral, pharmaceuticals and food laboratory testing and certification group that provides services to a diverse range of industries. The company held its AGM recently and provided updated guidance for a first-half FY19 net profit of $85–90m, implying a 21–28% year-on-year growth rate, which is stronger than our 16% expectation.


The main positives from the AGM statement included:


  • continued double-digit-plus sample growth in commodities and market-share gains; and
  • comments that “investors and shareholders will see continued improvement in the profitability of the life sciences business stream over future reporting periods”, and that a bolt-on acquisition would be made in the life sciences division.


In separate news, ALS has completed three acquisitions in its life sciences division – Brazil-based LABFOR Analises Laboratorias, US-based Truesdail Laboratories and Italy-based FELSILAB – at a total cost of $18m, marking its first corporate action since the acquisition of Sweden-based Mikrolab Group last October. We are encouraged that the company has returned to making bolt-on acquisitions, although integration will likely be in sharp focus given profitability improvements are coming through more slowly than expected from its recently acquired UK-based business, ALControl Laboratories.


Updating our model for these events has increased our EPS estimates, and we have raised our target price to $8.19 from $6.63 as a result of our higher valuation multiples. We maintain our Hold recommendation, which we recently upgraded from Lighten as a result of stronger-than-expected first-half FY19 guidance.


The main reason for our previous Lighten recommendation was the risk of an earnings downgrade, principally from the continuing erosion of margins in the life sciences business. We have not seen the divisional detail, but the strength of the guidance number – coupled with positive management commentary – leads us to believe the chances of earnings disappointment in the near term have diminished. The key question that remains relates to delivery on the life sciences margin improvement and the degree to which pricing will recover in the geochemistry business.


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