Environmental│Australia│Equity research│October 19, 2016
ALS
Minerals leverage should start playing out
ADD (previously HOLD)
Current price:
Target price:
Previous target:
Up/downside:
Reuters:
Bloomberg:
Market cap:
A$6.08
A$7.05
A$5.32
16.0%
ALQ.AX
ALQ AU
US$2,351m
A$3,066m
US$11.39m
A$14.98m
504.2m
96.0%
Average daily turnover:
Current shares o/s
Free float:
■
Numerous leading indicators on exploration spend, metres drilled and junior
capital raises all imply that the outlook for ALQ’s minerals business should
materially improve in FY18/FY19.
■
On our forecasts ALQ is trading at an FY18F PE of 20x, which is a 15% discount
to international peers and, in our view, ALQ offers stronger leverage to ongoing
improvements in minerals exploration.
■
There are a number of catalysts for ALQ over the coming months. Firstly, potential
acquisitions in the Life Science division. Secondly, ALQ will report its 1H17 result
on 29 November and we would hope to see further outlook commentary around
minerals and clarity around the longevity of the energy division. Finally, we expect
further positive data points around minerals.
■
We move to an Add rating and A$7.05 SOTP-based price target.
Front end cyclical leverage
Price Close
Relative to S&P/ASX 200 (RHS)
6.80
126.0
5.80
111.0
4.80
96.0
3.80
81.0
2.80
20
66.0
15
Vol m
10
With global mineral sample flows up strongly over the last few months, coupled with
continued strength in junior and intermediate capital raisings, we believe the positive
trend in commodities will continue. At ALQ's AGM in July, the group said its Minerals
EBIT margin was up 280bp on the pcp. In our view, as volumes continue to improve and
as more money flows into to exploration, ALQ's margins will accelerate from c14.5% at
2H16-end to above 30%. This margin increase will materially impact ALQ’s bottom line
given ALQ's high fixed cost base. Consequently, we have materially increased our
Minerals assumptions across the forecast period. We now forecast Minerals EBIT of
A$99m (from A$64m) in FY18 and A$120m (from A$78m) in FY19.
Coupled with growth in Life Science
5
Oct-15
Jan-16
Apr-16
Jul-16
Source: Bloomberg
Price performance
Absolute (%)
Relative (%)
1M
14.7
12.5
3M
18.1
19
12M
14.5
11.8
ALQ’s Life Science business is considered non-cyclical and therefore more defensive
than its minerals/energy businesses. ALQ has grown out this division since 2001. The
group has earmarked cA$180m for acquisition in the Life Science space with
management expecting A$80m of acquisitions before Christmas. Longer term, the aim is
for the Life Science business to make up 70% of revenue when minerals are at the cycle
peak. This clearly highlights ALQ’s growth ambitions for this division.
Investment view
Alexandra CLARKE
T (61) 2 9043 7905
E [email protected]
In our view, ALQ is well placed to ride out the resource cycle and benefit from increased
capital raisings in junior resources, which are likely to hit sample flows over the coming
12 months. While the FY17 result is still likely to show the underlying weakness in
resources/energy, numerous data points are all pointing towards a better minerals
environment over the coming 12-24 months. While we are never going to pick the
quantum and speed at which ALQ’s earnings will turn, we do believe investors will be
rewarded longer term with significantly higher earnings. While on face value ALQ looks
expensive on a multiples basis, it remains at a discount to international peers. We
continue to believe services companies should be bought when they are expensive at
the bottom of the cycle as earnings will flow through, which will see the multiple revert to
more normal levels. We move our rating to an Add and post rolling forward our SOTP
valuation to FY18, our price target lifts to A$7.05 (from A$5.32).
Financial Summary
Revenue (A$m)
Operating EBITDA (A$m)
Net Profit (A$m)
Normalised EPS (A$)
Normalised EPS Growth
FD Normalised P/E (x)
DPS (A$)
Dividend Yield
EV/EBITDA (x)
P/FCFE (x)
Net Gearing
P/BV (x)
ROE
% Change In Normalised EPS Estimates
Normalised EPS/consensus EPS (x)
Mar-15A
1,493
301.8
(178.6)
0.30
(28.8%)
20.56
0.21
3.45%
10.72
66.76
63.2%
2.04
9.1%
Mar-16A
1,365
279.5
(225.5)
0.24
(19.9%)
26.37
0.14
2.22%
10.77
NA
38.1%
2.23
8.3%
Mar-17F
1,385
252.6
107.6
0.23
(3.0%)
28.48
0.13
2.14%
12.97
59.89
34.3%
2.51
9.0%
4.3%
1.08
Mar-18F
1,427
312.8
153.5
0.30
32.3%
19.97
0.16
2.63%
11.04
44.00
28.8%
2.37
12.2%
20.6%
1.12
Mar-19F
1,474
354.8
186.4
0.37
21.4%
16.45
0.19
3.13%
9.57
36.58
22.7%
2.22
13.9%
16.1%
1.21
SOURCE: MORGANS, COMPANY REPORTS
IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS
CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
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Environmental│Australia│Equity research│October 19, 2016
Figure 1: ALQ financial summary
ALS Limited
Income statement (A$m)
Divisional sales
Total revenue
EBITDA
Associate income
Depreciation
EBITA
Amortisation/impairment
EBIT
EBIT(incl associate profit)
Net interest expense
Pre-tax profit
Income tax expense
After-tax profit
Minority interests
NPAT (normalised)
Significant items
NPAT (reported)
2015A
1,493
1,493
301.8
0.0
(83.7)
218.1
(12.1)
206.0
206.0
(33.1)
172.9
(51.9)
121.0
(1.8)
119.2
(297.8)
(178.6)
2016A
1,365
1,365
279.5
0.0
(86.4)
193.1
(15.2)
177.9
177.9
(34.5)
143.4
(42.9)
100.5
(1.0)
99.5
(325.0)
(225.5)
2017F
1,385
1,385
252.6
0.0
(73.5)
179.1
(1.5)
177.6
177.6
(30.3)
147.3
(40.2)
107.1
(1.0)
107.6
0.0
107.6
Cash flow (A$m)
EBITDA
Change in working capital
Net interest (pd)/rec
Taxes paid
Other oper cash items
Cash flow from ops (1)
Capex (2)
Disposals/(acquisitions)
Other investing cash flow
Cash flow from invest (3)
Incr/(decr) in equity
Incr/(decr) in debt
Ordinary dividend paid
Preferred dividends (4)
Other financing cash flow
Cash flow from fin (5)
Forex and disc ops (6)
Inc/(decr) cash (1+3+5+6)
Equity FCF (1+2+4)
2015A
301.8
0.6
(33.1)
(56.3)
2.2
215.2
(76.5)
(30.2)
0.9
(83.0)
27.2
(95.5)
(77.9)
0.0
14.0
(132.2)
0.0
0.0
138.7
2016A
279.5
(38.2)
(34.5)
(39.0)
1.8
169.6
(73.7)
(22.8)
3.4
(88.0)
317.0
(335.6)
(72.0)
0.0
9.0
(81.6)
0.0
0.0
95.9
2017F
252.6
(5.5)
(30.3)
(40.2)
1.0
177.6
(65.0)
(22.8)
3.4
(84.4)
0.0
(42.0)
(61.2)
0.0
10.0
(93.2)
0.0
0.0
112.6
2018F
312.8
(13.5)
(26.4)
(59.9)
1.0
214.0
(65.0)
(22.8)
3.4
(84.4)
0.0
(59.9)
(80.7)
0.0
11.0
(129.6)
0.0
0.0
149.0
2019F
354.8
(11.7)
(22.2)
(74.0)
1.0
248.0
(72.0)
(22.8)
3.4
(91.4)
0.0
(72.8)
(95.8)
0.0
12.0
(156.6)
0.0
0.0
176.0
2015A
163.1
313.5
76.1
25.7
0.0
1,250.4
491.9
86.2
2,406.9
4.1
158.4
935.4
6.7
73.9
1,178.5
0.0
0.0
1,134.1
(23.1)
0.0
0.0
104.5
0.0
1,215.5
12.9
1,228.4
2,406.9
2016A
297.9
275.2
79.0
31.1
0.0
923.7
457.3
80.7
2,144.9
1.0
150.9
748.5
8.7
50.2
959.3
0.0
0.0
1,452.7
(51.4)
0.0
0.0
(224.3)
0.0
1,177.0
8.6
1,185.6
2,144.9
2017F
227.5
280.9
83.1
48.7
0.0
936.4
447.3
77.3
2,101.2
13.0
155.2
636.5
8.7
56.3
869.7
0.0
0.0
1,497.6
(51.4)
0.0
0.0
(224.3)
0.0
1,221.9
9.6
1,231.5
2,101.2
2018F
174.0
289.3
85.6
66.3
0.0
936.4
438.9
73.9
2,064.4
11.0
152.6
538.5
8.7
49.7
760.5
0.0
0.0
1,569.0
(51.4)
0.0
0.0
(224.3)
0.0
1,293.3
10.6
1,303.9
2,064.4
2019F
132.4
298.8
88.4
83.9
0.0
936.4
438.1
70.5
2,048.6
9.0
153.3
440.5
8.7
43.1
654.6
0.0
0.0
1,658.1
(51.4)
0.0
0.0
(224.3)
0.0
1,382.4
11.6
1,394.0
2,048.6
Balance sheet (A$m)
Cash & deposits
Trade debtors
Inventory
Investments
Goodwill
Other intangible assets
Fixed assets
Other assets
Total assets
Short-term borrowings
Trade payables
Long-term borrowings
Provisions
Other liabilities
Total liabilities
Preference shares
Hybrid equity
Share capital
Other reserves
FCTR
Unrealised gains/losses
Retained earnings
Other equity
Total equity
Minority interest
Total shareholders' equity
Total liabilities & SE
Year end March
2018F
2019F
1,427
1,474
1,427
1,474
312.8
354.8
0.0
0.0
(72.0)
(71.2)
240.8
283.6
(1.5)
(1.5)
239.3
282.1
239.3
282.1
(26.4)
(22.2)
212.9
259.9
(59.9)
(74.0)
153.0
185.9
(1.0)
(1.0)
153.5
186.4
0.0
0.0
153.5
186.4
Closing price (A$)
Divisionals
6.08
2016A
Target price (A$)
2017F
2018F
7.05
2019F
Divisional sales revenue
Minerals
Life Sciences
Energy
Industrial
343.0
633.5
202.8
185.6
335.5
712.5
153.0
192.4
410.7
741.2
156.5
196.3
444.1
769.2
160.1
200.2
Divisional EBIT
Minerals
Life Sciences
Energy
Industrial
Overheads
59.0
109.3
(8.0)
24.6
(12.2)
64.7
114.3
(8.9)
25.6
(18.0)
98.7
123.5
7.5
26.4
(16.8)
119.9
140.8
10.5
28.0
(17.1)
2016A
3,855.0
2.8
13.8
21.7
26.4
(1.2)
2.23
2017F
3,525.9
2.5
14.0
19.8
28.5
(3.8)
2.51
2018F
3,497.3
2.5
11.2
14.6
20.0
0.5
2.37
2019F
3,451.7
2.3
9.7
12.2
16.4
0.8
2.22
At target price
EV/EBITDA (x)
PE (normalised) (x)
2016A
14.3
30.6
2017F
15.8
33.0
2018F
12.6
23.2
2019F
10.9
19.1
Per share data
No. shares
EPS (normalised) (cps)
EPS (dil. normalised) (cps)
Dividend per share (cps)
Franking (%)
Dividend payout ratio (%)
Dividend yield (%)
2016A
431.5
23.7
23.1
13.5
10%
58.5%
2.2%
2017F
504.2
23.0
21.3
13.0
10%
60.9%
2.1%
2018F
504.2
30.4
30.4
16.0
10%
52.6%
2.6%
2019F
504.2
37.0
37.0
19.0
10%
51.4%
3.1%
Growth ratios
Sales growth
Operating cost growth
EBITDA growth
EBITA growth
EBIT growth
Reported NPAT growth
Normalised NPAT growth
Reported EPS growth
Normalised EPS growth
2016A
-8.6%
-8.9%
-7.4%
-11.5%
-13.6%
26.3%
-16.5%
17.9%
-22.0%
2017F
1.5%
4.4%
-9.6%
-7.2%
-0.1%
-147.7%
8.2%
-140.8%
-7.4%
2018F
3.0%
-1.6%
23.8%
34.4%
34.7%
42.6%
42.6%
42.6%
42.6%
2019F
3.3%
0.4%
13.5%
17.8%
17.9%
21.4%
21.4%
21.4%
21.4%
Operating performance
Asset turnover
EBITDA margin
EBIT margin
Net profit margin
Return on net assets
Net debt (A$m)
Net debt/equity
Net interest/EBIT cover (x)
ROIC
2016A
16.4%
20.5%
13.0%
7.3%
15.0%
451.6
38.1%
5.2
6.2%
2017F
16.1%
18.2%
12.8%
7.8%
14.4%
422.0
34.3%
5.9
7.7%
2018F
16.6%
21.9%
16.8%
10.8%
18.4%
375.5
28.8%
9.1
10.3%
2019F
17.3%
24.1%
19.1%
12.6%
20.2%
317.1
22.7%
12.7
12.1%
Internal liquidity
Current ratio (x)
Receivables turnover (x)
Payables turnover (x)
2016A
3.6
5.1
7.7
2017F
3.0
4.9
7.1
2018F
2.9
4.9
7.4
2019F
2.9
4.9
7.3
Multiples
Enterprise value (A$m)
EV/Sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PE (normalised) (x)
PEG (normalised) (x)
Price/Book (x)
SOURCES: MORGANS, COMPANY REPORTS
2
Environmental│Australia│Equity research│October 19, 2016
1H17 result preview - 29 November
Earnings guidance: At its AGM ALQ provided NPAT guidance for 1H17 of
A$50-55m (pre amortisation), which at its mid-point implies 1H17 will be c15%
below 1H16 but up c40% on 2H16. We forecast ALQ to deliver 1H17 NPAT of
A$53m.
Morgans versus Bloomberg consensus: No Bloomberg consensus is
available for 1H17. However, Bloomberg consensus forecasts for FY17
underlying NPAT is A$107.7m compared to our forecast of A$108m.
Key things to look out for at the result:

Commentary around Energy: At the AGM, ALQ had guided for O&G to
lose cA$14m in 1H17 but hoped to be breakeven by September and
therefore produce a much improved 2H. Recent management commentary
implies that the O&G division failed to break even in September. We would
be hopeful that management may provide some commentary around the
longevity of this division and whether the group may undertake a
restructure, closure or sale of all/or some of the Reservoir assets. In our
view the O&G division has been a distraction for management and clarity
around its long-term viability would be a positive.

Growth opportunities in Life Science: The group has earmarked
cA$180m for acquisitions in the Life Science space. ALQ expects a
number of these acquisitions to be completed by Christmas, which
collectively would require cA$80m of funding.

Outlook commentary: We continue to believe that FY17 will remain
challenging for ALQ, although with numerous data points suggesting an
uptick in exploration and sample volumes over the coming 12 months, we
will be looking for positive outlook commentary on demand.
Minerals cycle driven by gold
ALQ’s Minerals business accounted for c35% of group EBIT in FY16. Within
Minerals, the geochem revenue from gold is c43%. As the figure below outlines,
gold clearly remains the major commodity of exploration spend not only at the
top of a cycle but at the bottom of the cycle as well.
Figure 2: Global exploration budgets driven by gold
SOURCES: SNL METALS & MINING, COMPANY REPORTS
3
Environmental│Australia│Equity research│October 19, 2016
Improving minerals outlook has led to increase in capital raisings
With the improving outlook for minerals (particularly gold), we have seen an
increase in the number of capital raisings from smaller resource companies. To
generalise, previous raisings in our view were undertaken to shore up balance
sheets rather than undertake further exploration. We believe the most recent
capital raisings are likely to lead to exploration spend, which will drive not only
sample flows through ALQ’s labs but also margin expansion given greenfield
exploration is the higher margin product for ALQ.
Below we have provided two figures on equity raisings, which is split between
country and commodity. As shown, Australian and Canadian companies have
dominated in raisings predominately in gold and base metals.
Figure 3: Equity raisings by junior miners (sub $500m mkt cap) by country
SOURCES: BLY COMPANY REPORTS
Figure 4: Junior and intermediate financings completed by commodity
SOURCES: ALQ COMPANY REPORTS
4
Environmental│Australia│Equity research│October 19, 2016
Global sample flows moving in the right direction
The most recent ABS data indicates that in exploration both metres drilled and
expenditure of metres drilled has improved with the last five quarters reporting
positive trends. While this is Australian centric data, we do believe it is
representative of other gold and base metal nations. In our view, the below
data provides a positive lead indicator for sample volumes.
Figure 5: Mineral exploration - metres drilled (seasonal) - %
change
Figure 6: Minerals exploration - expenditure of metres drilled
(seasonal) - % change
50.00%
80.00%
40.00%
60.00%
Title:
Source:
Please fill in the values above to have them entered in your report
30.00%
40.00%
20.00%
20.00%
10.00%
0.00%
0.00%
-20.00%
-10.00%
-40.00%
-30.00%
-60.00%
Sep-1989
Sep-1990
Sep-1991
Sep-1992
Sep-1993
Sep-1994
Sep-1995
Sep-1996
Sep-1997
Sep-1998
Sep-1999
Sep-2000
Sep-2001
Sep-2002
Sep-2003
Sep-2004
Sep-2005
Sep-2006
Sep-2007
Sep-2008
Sep-2009
Sep-2010
Sep-2011
Sep-2012
Sep-2013
Sep-2014
Sep-2015
Sep-1989
Sep-1990
Sep-1991
Sep-1992
Sep-1993
Sep-1994
Sep-1995
Sep-1996
Sep-1997
Sep-1998
Sep-1999
Sep-2000
Sep-2001
Sep-2002
Sep-2003
Sep-2004
Sep-2005
Sep-2006
Sep-2007
Sep-2008
Sep-2009
Sep-2010
Sep-2011
Sep-2012
Sep-2013
Sep-2014
Sep-2015
-20.00%
SOURCES: ABS
SOURCES: ABS
As the figure below outlines, ALQ’s sample volumes have been increasing
since about February after a false start in mid 2015. While ALQ has undertaken
a significant cost out program since the downturn, given the nature of the
business the group still has a high fixed cost base. As such as sample volumes
increase, this will drive margins. At the Morgans Qld Conference management
stated that for every additional $1 of work, 50 cents should fall to the bottom
line. This clearly demonstrates the leverage of ALQ in an increasing volume
market.
Figure 7: ALS global minerals sample flow (growth trend)
SOURCES: COMPANY REPORTS
5
Environmental│Australia│Equity research│October 19, 2016
Increased volumes drive margin expansion
ALQ’s minerals business has seen a number of cycles and, as shown in the
figure below, its margins contract and expand through time. At its full year peak
Minerals contributed cA$215m EBIT (c36% margins) to the group, while at its
FY16 result Minerals contributed A$59m (c14.5% margins in 2H16). We are
forecasting modest margin improvement in FY17 (from A$59m to A$65m) as
we believe the flow through from recent capital raises is likely to take 12
months before it impacts sample flows. We have a far more bullish outlook for
FY18 and FY19 where we anticipate that margins continue to improve as both
volumes increase and as more exploration work (high margin) is undertaken,
which will drive margins higher in the Minerals division.
Figure 8: ALQ's mineral margins through cycles
40%
35%
30%
25%
20%
15%
10%
5%
0%
SOURCES: MORGANS
We believe longer term, ALQ should be able to achieve minerals margins over
30%. However, at this stage we do not believe margins will return to peak
(c36%) levels given that ALQ is likely to seek out further market share gains
over price. Despite ALQ’s margin declines in recent years, its margins remain
at or above global peers and demonstrate ALQ’s leading platform and its ability
to optimise its service and leverage its cost base better than its peers.
Figure 9: ALQ’s historical revenue and EBITDA margin for Minerals & Energy
segments
SOURCES: COMPANY REPORTS
6
Environmental│Australia│Equity research│October 19, 2016
Changes to forecasts
We still believe FY17 will remain tough for ALQ, but we have made a number
of positive changes to our forecasts predominantly around our expectations for
Minerals in FY18 and FY19. While the timing and quantum of the uplift in
minerals remains difficult to accurately time, we do believe over the coming 1218 months ALQ’s minerals margins will improve significantly. We have also
made minor adjustments to our coal expectations, which have led to an
improved outcome in our Energy division. We note that we have not factored in
any contribution from anticipated Life Science acquisitions.
Our FY17 NPAT forecast of A$108m implies a 2H17 NPAT of A$55m, which is
broadly in line with consensus (Bloomberg at A$107.7m).
We maintain a payout ratio of 50% (vs 61% in FY16), which falls in line with
management’s payout ratio target of 50-60%.
Figure 10: Changes to forecasts
Old
FY17F
New
Δ
Old
FY18F
New
Δ
Old
FY19F
New
Δ
Earnings
Revenue
- Minerals
- Life Sciences
- Energy
- Industrial
A$m
A$m
A$m
A$m
A$m
1431
308
713
139
195
1505
335
713
153
192
5%
9%
0%
10%
-1%
1431
318
763
147
203
1505
411
741
156
196
5%
29%
-3%
6%
-3%
1507
339
800
156
211
1574
444
769
160
200
4%
31%
-4%
3%
-5%
EBITDA
EBITDA margin
A$m
%
246
17%
253
17%
3%
-2%
275
19%
313
21%
14%
8%
318
21%
355
23%
12%
7%
EBIT
- Minerals
- Life Sciences
- Energy
- Industrial
EBIT margin
A$m
A$m
A$m
A$m
A$m
%
171
59
120
-11
26
12%
178
65
114
-9
26
12%
4%
10%
-4%
-16%
0%
-1%
202
64
128
8
27
14%
239
99
123
7
26
16%
19%
55%
-4%
-2%
-3%
13%
245
78
153
10
30
16%
282
120
141
11
28
18%
15%
54%
-8%
2%
-8%
10%
Net interest expense
Tax expense
A$m
A$m
30
38
30
40
0%
5%
26
49
26
60
0%
23%
22
63
22
74
0%
18%
NPAT pre amortisation
Amortisation
Net Significant items
A$m
A$m
A$m
102
2
0
106
2
0
4%
0%
126
2
0
152
2
0
21%
0%
159
2
0
185
2
0
16%
0%
Reported NPAT
A$m
103
108
4%
127
154
21%
161
186
16%
Adjusted EPS
Total Dividend (cps)
CPS
CPS
22
12
23
13
4%
8%
25
13
30
16
21%
23%
32
17
37
19
16%
12%
Cashflow
Operating CF
Investing CF
Free CF
A$m
A$m
A$m
174
-84
109
178
-84
113
2%
0%
3%
192
-84
127
214
-84
149
11%
0%
17%
222
-91
150
248
-91
176
12%
0%
17%
Balance Sheet
Net Debt
Gearing
Leverage Ratio
EBIT interest cover
A$m
%
x
x
421
34%
1.7
5.7
422
35%
1.7
5.9
0%
0%
-2%
4%
381
30%
1.4
7.6
375
29%
1.2
9.1
-1%
-2%
-13%
19%
338
25%
1.1
11.0
317
23%
0.9
12.7
-6%
-8%
-16%
15%
504
504
0%
504
504
0%
504
504
0%
Shares on issue
SOURCES: MORGANS, COMPANY REPORTS
7
Environmental│Australia│Equity research│October 19, 2016
Investment view
We continue to value ALQ on a SOTP methodology. As outlined in our last few
reports, post the private equity bid and improvement in the macro, we believe
the market is more willing to look at ALQ on through-the-cycle minerals
earnings. As such, we continue to value our Minerals division on mid cycle
earnings as outlined in the figure below. Our valuation range for ALQ is
A$5.96-7.05ps (from A$5.32-6.35) as we roll over our SOTP to FY18. Given
the improvement in the macro, we believe it is now possible to set our price
target at the top end of our valuation. Post revisions to our forecasts and rolling
over to FY18, our new price target is A$7.05 per share (previously A$5.32). We
upgrade our rating to an Add. However, we acknowledge that in the short term
investors will need to balance ALQ’s high quality core attributes against shortterm cyclical issues, which may continue to impact FY17 before any real
benefits are seen in FY18 and FY19.
Figure 11: SOTP valuation
EBIT Multiple
Low
High
Minerals (mid cycle)
Life Sciences (FY18)
Energy (FY18)
Industrial (FY18)
Corporate overheads (FY18)
10
14
8
11
9
EBIT
12
16
9
12
10
Valuation
Low
High
145
123
7
26
-17
1450
1729
60
291
-151
1740
1976
67
317
-168
Enterprise value
3378
3933
Less: net debt
375
375
Equity value
Fully diluted no. of shares on issue
Valuation per share
3003
504
5.96
3557
504
7.05
Price Target
7.05
SOURCES: MORGANS, COMPANY REPORTS
In our view, on fundamentals as the cycle turns, we expect the valuation gap
between ALQ and its international peers to continue to close. ALQ’s cyclicality
of earnings is typically greater than its international peers. Our forecasts
assume no significant acquisitions given timing, cost and contribution
uncertainty.
Figure 12: ALQ peer compco
PE
Mcap
USDm
Intertek Group plc
SGS SA
Bureau Veritas SA
Eurofins Scientific Societe Europeenne
Core Laboratories NV
ALS Ltd.
AVERAGE
MEDIAN
7,085
16,612
8,680
7,760
4,939
2,349
EV/EBITDA
FY + 1
+1
22.2x
25.3x
18.6x
42.5x
FY + 2
+2
20.1x
23.3x
17.7x
36.4x
FY + 3
+3
18.5x
21.5x
16.7x
30.9x
28.2x
27.4x
25.3x
21.2x
23.7x
21.2x
17.1x
21.0x
18.5x
FY + 1
+1
13.8x
13.4x
11.2x
17.6x
42.9x
11.9x
19.8x
13.8x
FY + 2
+2
12.7x
12.6x
10.8x
15.6x
31.7x
9.9x
16.7x
12.7x
EPS gth (%)
FY + 3
+3
11.8x
11.8x
10.4x
14.0x
22.3x
9.0x
14.0x
11.8x
Dividend Yield
FY+1
FY+2
FY+3
FY+1
FY+2
FY+3
-4.6%
2.6%
1.3%
31.6%
NA
4.7%
7.7%
1.9%
10.4%
8.2%
5.2%
16.8%
NA
33.0%
10.1%
9.3%
8.7%
8.4%
5.7%
17.8%
NA
23.8%
10.2%
8.6%
1.7%
3.3%
3.0%
0.5%
1.9%
2.1%
2.1%
1.9%
1.8%
3.4%
3.1%
0.6%
1.9%
2.6%
2.2%
1.9%
2.0%
3.6%
3.3%
0.6%
2.0%
2.9%
2.3%
2.0%
SOURCES: FACTSET
The key risks to our target price include: no additional takeover bid by either
private equity or an industry player; a greater-than-anticipated postponement or
cancellation of exploration expenditure amidst global economic concerns; a
fundamental downturn in the commodities sector; dilutive capital raising; and
ALQ's inability to diversify its testing business into new sectors.
8
Environmental│Australia│Equity research│October 19, 2016
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