Regal Funds Management: ALS Limited
Ticker ASX: ALQ
One of our high conviction positions is ALS Limited (ASX: ALQ), a global provider in laboratory testing, inspection and certification services to multiple industries including the mining, environmental, food, pharmaceutical, and industrial sectors. We see compelling upside due to the following key factors:
1. Minerals division set to benefit from a boom in minerals exploration spend
ALS commands a market leading position in its Minerals division (~50% of FY19 EBIT), specifically in Geochemistry, which involves the testing of core samples obtained from exploration drilling. Gold and copper represent ~50% and ~20% respectively of total mineral exploration spend globally. With the USD Gold Price recently surging to record highs, it looks like the stage is set for another boom in exploration spend. The last boom in CY12, saw global non-ferrous exploration spend peak at US$22bn compared to an estimated CY20 spend of only US$7bn. Whilst the higher gold price is yet to translate into more work for ALS, the recent spike in junior mining equity raisings gives us confidence that this will occur, albeit with a lag.
2. Currency and Market Share movements add further tailwinds
For ALS, this upswing in activity has the potential to produce a material uplift in earnings. During the FY12 peak, for example, ALS made A$215M in EBIT from its Minerals division, versus just A$158M in FY19. Given ALS earns most of its revenue overseas, adjusting for the lower AUD against its key currencies (USD, CAD, EUR) since the previous peak in 2012, we would estimate the A$215M FY12 EBIT becomes ~A$280M on a like-for-like basis. This essentially implies that a return to peak exploration levels of 2012, could equate to growth of ~80% versus FY19 levels for this part of the business. Further, market share gains, if held, could represent another leg of upside, given ALS’ market share today (est 45%+) is materially higher than in 2012 (est 30-35%).
Lastly, with the Life Sciences division (~40% of FY19 EBIT) also expected to recover and deliver robust growth, the growth prospects for the group could track materially ahead of market expectations over the medium term.
Key risks include a second wave of COVID-19 cases globally affecting ALQ’s operations, whilst persistent weakness in the gold price or equity markets could dampen capital raisings, impacting the exploration recovery.
Regal may now, or in the future, have a position in ALS Limited (ASX: ALQ). Regal does not authorise this stock pick to be relied upon by retail investors.