The share price of ALS Ltd (ASX:ALQ) has taken a tumble in the last several weeks. What are the reasons for it and does this now represent a buying opportunity?
ALS Ltd is a global provider of testing services, with operations in more than 350 locations across 55 countries. Services include laboratory testing for the mineral, coal, environmental, food and pharmaceutical industries.
The Life Sciences division is the largest contributor to revenue (~50%). It conducts analytical testing in the Environmental, Food, Pharmaceutical, Industrial Hygiene, and Consumer Products segments. About one-third of revenue is generated from the Commodities division. This comprises testing in four business segments, the major one being testing geochemistry samples.
When we last reviewed ALS Ltd in June this year, we were cautious on the stock. This was because the earning growth profile was becoming more heavily reliant on a cyclical recovery in the Commodities division. In contrast to the consensus view, we took a view that the benefit to ALQ from the recovery (i.e. improved pricing) would take longer to flow through.
Why has ALS Ltd underperformed?
After a strong run in the share price, to a closing high of $8.47 on 12 October, the stock has since fallen sharply. This was on the back of the release of its first half results for the 2018 financial year (1H18 – the Company has a March balance date), as the market’s expectations were not met. In particular:
1. Despite the Life Sciences division reporting solid revenue growth across all geographic regions (+14%), EBIT rose by only 0.5%, due to competitive pressures in the US and UK leading to lower earnings in North America and Europe.
2. A strong, albeit slowing, rate of growth in geochemistry volumes is not yet being reflected in improved pricing, which the market was expecting. This is despite established mining clients continuing to increase spending on existing brownfield work even in higher risk countries and junior explorers have also started to lift activity.
ALS Ltd is currently trading on a 1-year forward multiple of ~22x. Notwithstanding the de-rating in the share price, we do not consider this attractive. This is in light of the ongoing challenges in the key Life Sciences and Commodities divisions. It also potentially leads to ALS Ltd once again not meeting lofty earnings growth expectations.
The chart for ALS Ltd
The stock has fallen back towards the uptrend line that started at the beginning of 2016. Although it seems to be holding it for now, the decline since the September 2017 peak looks as though it will at least make a 5-wave decline. That is, we are in a fourth wave now and investors should brace for another drop towards $6 to complete the downwards move.
Michael Gable is managing director of Fairmont Equities.
Sign up to our newsletter. It comes out every week and its free!
Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.
Like this article? Share it now on Facebook and Twitter!