In this section we place one stock under the microscope and give it the unconventional assessment.
ALS Limited (ALQ) – Is the former Campbell Brothers Limited. ALS Limited is one of the world’s biggest and most profitable testing companies. It also specialises in inspection, certification and verification services, head quartered in Brisbane, Australia. It services multiple industries globally and employs over 13,000 staff in over 65 countries and has been around for 40 years. The company initially provided laboratory services to the oil shale and mineral exploration industries but has since expanded its services. In the past, 60% of earnings were tied to commodity markets. But the end of the resources boom caused it to diversify into other industries such as industrial, environmental, food testing and asset maintenance. This has reduced its minerals exposure to 40%. The company operates in these four divisions:
- ALS Life Sciences: Comprises four primary analytical testing areas: Environmental, Food and Pharmaceutical, Electronics, and Consumer Products.
- ALS Minerals: Provides testing services for the global mining industry in four key service areas: Geochemistry, Metallurgy, Mine Site Services and Inspection. Mineral services cover the entire resource life-cycle from exploration, feasibility, production, design, development through to trade, and finally rehabilitation.
- ALS Energy: Delivers quality technical solutions to the coal, and oil and gas industries through an expansive range of analysis and certification testing services supporting exploration, production and cargo shipment.
- ALS Industrial: Provides diagnostic testing and engineering solutions for the energy, resources, transportation and infrastructure sectors.
- ALS has a strong brand, skilled staff and good relationships with large clients.
- The company has diversified away from just minerals and energy (cyclical commodities). This helps offset any downturn in the market.
- ALS now has exposure to food, pharma testing as well as inspection and certification markets.
- It’s exposure to minerals and energy could once again provide upside earnings potential if there is another mining boom.
- 40% of its earnings are tied to minerals and energy. Any severe downturn will hit the bottom line.
- Lower demand for commodities will also mean scale benefits will start to dry up contributing to lower margins.
- ALS charges a premium for quality work. Competitors may enter and undercut ALS on price.
On fundamentals, the company is neither good nor bad. The company trades on a rather high PE of 41.72x but it is forecast to drop to 26.83x next year. ROE isn’t overly high, but it is stable and rising from 9.58% to 12.26%, which is the main thing. Dividend is low. EPS growth is 44% and high. Debt to Equity is at 63%, which isn’t bad. The intrinsic value is below the current share price, so some might argue that the stock is somewhat overvalued.
- Deutsche Bank has a Hold recommendation with a target price of $7.73. The broker says there is a definite recovery in minerals testing which is a positive for the company. Hold rating kept.
- Macquarie has an Outperform recommendation with a target price of $7.80. The broker believes ALS’ guidance for 1H18 is a little conservative. It has also factored in acquisitions of $450m for Life Sciences. This means there will be a small increase to its forecasts.
Looking at the chart, ALS seems to have reversed and is sitting towards the upper end of its uptrend channel. Ideally you’d want to be buyng near the channel’s support line i.e. around $7.30. Of-course waiting for a dip that may never come is a hard game to play. So we recommend buying around the $8 mark. If this trend continues, over the longer term the stock will move higher.
Unconventional View: We quite like the ALS Limited story. The company has a long and rich 40 year history that has enabled it to become a market leader in laboratory resting for the minerals and oil and gas space. It has a strong brand, skilled staff and is scalable across the markets it is exposed to. It also has strong relationships with large clients that give it a key competitive advantage. The company however recently completed the sale of its oil and gas business to Chicago-based Madison Industries for $109m. This gives it some $300m in the bank for bolt-on acquisitions that could boost returns for shareholders. Shares have been on a tear despite there being no notable news or upgraded broker reports. All indications point to a solid FY result which was later followed up with a 1H18 guidance upgrade. The company expects NPAT to be in the range of $70m-$75m up from $60m in FY17.
Overall we think ALS has built itself a great reputation around technical innovation, quality and a deep client understanding. We think it will continue to kick goals and its upcoming profit result should impress on the upside. At the moment the stock is sitting on 68 on the StockOmeter. That means it’s both its fundamentals and technicals are at a Buy. But as mentioned before the stock is looking a touch ritzy. Ideally you’d want to be buying on a dip. So we recommend buying around the $8 mark. If this uptrend trend continues over the longer term, the stock will move higher.