You can understand why Brisbane-based testing group, ALS Limited will offer shareholders a $175 million buy back, as well as a higher interim dividend after announcing an underlying net profit after tax of $70.1 million for the six months to September 30, 2017. While the company reported a solid underlying result, the after tax result including one offs saw the impact of more impairments on its assets – this time in its coal testing division.
Coming hard on the heels of the write-down and losses of hundreds of millions of dollars in its oil business (finally sold off in the half), investors won’t be that impressed, hence the buyback and the higher dividend to help ease any concerns among investors.
In fact interim dividend was boosted to 8 cents a share from 5.5 cents which is at the top of the company’s 50% to 60% payout range. The buy back will be equal to just over 4% of the company’s current issued capital. The company said it would be financed out of cash balances and free cash flow over the next year.
On top of that the underlying result was at the lower end of the guidance range of $70 million to $75 million provided to the market at the Company’s annual meeting in July, which indicates profit margins remain under some pressure, despite a pick up in business from the recovery in commodity sector activity and prices.
The statutory result was a loss of after tax of $8.9 million compared with a net profit of $48.7 million recorded in the half year to September 2016.
Directors said the underlying result was 17.6% higher than the $59.6 million comparative underlying net profit after tax earned in the previous corresponding period primarily due to improvements in the performance of those businesses servicing mineral commodities markets.
The statutory result included impairment losses. "In recognition of uncertain market conditions being experienced in the sectors serviced by the Coal and Industrial businesses, goodwill impairment charges amounting to $63 million have been taken in respect of these cash generating units: Coal – $40 million and Industrial – $23 million,” directors said in yesterday’s statement.
Revenue from continuing operations of $721.6 million was up 14.5% on the $630.2 million recorded from the same businesses in the previous corresponding period.
"This reflects strong organic growth in the Commodities business and acquired and organic revenue gains in Life Sciences.
"The recovery being experienced in mineral commodities markets helped to push revenue in that segment up 22.3 % over the September 2016 half year at an improved contribution margin of 21.7%, the company said
"While revenue in Life Sciences grew by 13.9%, competitive pressures in Europe and North America saw contribution margin soften to 15.3%. Despite a flat revenue outcome in the Industrial segment strong cost disciplines resulted in the business recording a 3.5% improvement in contribution compared with the same period of 2016.
"As previously announced, the Group sold the majority of its Oil & Gas technical services business in July this year, retaining only the laboratory testing component. The divestment resulted in a gain on sale after tax of $0.9 million and recogniti on in the profit and loss statement of foreign exchange losses (relating to inter – company balances and previously recorded in the foreign currency translation reserve) of $11.1 million after tax,” the company said.
Looking to the rest of the year, directors said they expect group underlying profit after tax for the year to March 2018 to be in the range of $135 million to $145 million, based on current market trends , reflecting the seasonality of the business and subject to no material changes in the operating or economic environment. That would be up from the $112.7 million reported for 2016-17.
"The underlying fundamentals surrounding most ALS business streams continue to improve and it i s expected that the Company will have a stronger second half in FY2018 than the corresponding period last year.
"We anticipate ongoing year – on – year improvements in earnings in the Geochemistry business stream as sample flows continue to grow and from the Life Sciences operations in Europe and the Americas on the back of cost rationalisation and new contracts.
The interim result was announced well after the ASX Monday session had ended, so investors will make their judgement about the quality of the result and the outlook when trading resumes this morning.
Shares rose 1.1% to $8.15 on the ASX yesterday.
ALS CEO, Raj Naran said in yesterday’s statement the buy – back program reflects ALS’s commitment to efficient capital management and delivering improved returns to shareholders.
“Given the Company’s strong cash flow and balance sheet as well as our confidence in ALS’s future trajectory, the Board considers that a share buy – back provides the most appropriate use of the company’s capital at this point in time.”
“The buy – back program will not impact ALS’s existing dividend policy and business strategy. We will maintain the flexibility to respond to changes in market conditions and take advantage of growth opportunities that may arise in the future,” he said.