Tag: Commodities

Categories
Commodities Trading Ideas & Charts

Santos Ltd. rides high on strong LNG pricing

with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier. Santos boasts some of Australia’s largest and highest-quality coal seam gas reserves. East-coast LNG attracts export pricing and indirectly drives domestic prices in the direction of export parity.

Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. 

Financial Strength:

The fair value of Santos Ltd. is 10.20 which is mainly driven by time value of money and near-term energy price strength.

At end-June 2021 Santos had net debt of USD 2.8 billion, gearing (ND/(ND+E)) at 28% and annualised first-half net debt/EBITDA conservative at just 1.2. Santos’ debt covenants have adequate headroom and are not under threat at current oil prices. The weighted average term to maturity is around 5.5 years. Capital efficient development and fast up-front cash flows from Dorado’s oil should combine to ensure Santos’ leverage ratios continue to decline from current levels despite outgoings.

Bulls Say:

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still. 
  • Santos is in a strong position, with 0.9 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets. 
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Company Profile:

Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage has been set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Woodside Banks Higher Third-Quarter LNG Pricing With More to Come

Adding to Woodside’s competitive advantages are the long-term 20-year off-take agreements with the who’s who of Asia’s blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside’s cash flows once projects are complete.

Woodside also enjoys first-mover advantages. The NWS/JV has invested more than AUD 27 billion since the 1980s, building infrastructure at a fraction of the cost of today’s developments. With substantial growth aspirations, Woodside still has considerable expenditure ahead of it, but the existing infrastructure footprint is regardless a huge head start, from both an expenditure and a regulatory-approval perspective.

Woodside’s development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. 

Woodside Banks Higher Third-Quarter LNG Pricing With More to Come. 

Australia’s premier LNG company reported a 2% decline in third-quarter 2021 production to 22 million barrels of oil equivalent, or mmboe.LNG production was impacted by flagged maintenance at the North West Shelf’s Trains 2 and 4, and turnaround activities at Pluto LNG.Despite this, and reduced sales volumes due to inventory build, revenue increased 19% to USD 1.53 billion on higher averaged realised pricing. The average realised third-quarter LNG price increased by 40% to around USD 10.00 per mmBtu, considerably higher than the contract price. 

In the fourth quarter, Woodside can expect to see even greater benefit from stronger pricing given the one-quarter oil price lag in its LNG contracts, and the even greater spike in spot LNG prices post the third quarter. Woodside sold six LNG spot cargoes in the third quarter, in the vicinity of 10%-15% and is expecting approximately 17% of LNG to be sold at spot in the fourth quarter. In the third quarter, the LNG spot price doubled to more than USD 20 per mmBtu. But the average for October so far is closer to USD 35 per mmBtu.

Financial Strength 

Balance sheet strength remains a key appeal of Woodside. The company’s net debt/EBITDA of just 0.8 affords it the luxury of seriously pursuing growth countercyclically. Woodside’s net debt was USD 2.5 billion at June 2021 for modest 16% leverage. And despite expansionary capital expenditure programs, strong cash flows and a healthy balance sheet should regardless support ongoing dividend payments. Including merger with BHP Petroleum, we project net debt to remain modest at less than USD 3.0 billion.This includes a sustained 80% payout ratio.Expansionary expenditure on the Scarborough/Pluto T2 project, and potentially later on the Browse project, could see first expanded production in 2026. We model Woodside’s share of the combined capital cost after BHP Petroleum merger at circa USD 14.0 billion, driving a 13% increase in equity production to circa 250 mmboe, by 2027, and these are long-life additions.

Bulls Say 

  • Woodside is a beneficiary of continued increase in demand for energy. Behind coal, gas has been the fastest-growing primary energy segment globally. Woodside is favourably located on Asia’s doorstep. 
  • Woodside’s cash flow base is comparatively diversified, with LNG making it less susceptible to the vagaries of pure oil producers. Gas is a primary component of Asian base-load power generation. 
  • Gas has around half the carbon intensity of coal, and it stands to gain market share in the generation segment and elsewhere if carbon taxes are instituted, as some predict.

Company Profile

Incorporated in 1954 and named after the small Victorian town of Woodside, Woodside’s early exploration focus moved from Victoria’s Gippsland Basin to Western Australia’s Carnarvon Basin. First LNG production from the North West Shelf came in 1984. BHP Billiton and Shell each had 40% shareholdings before BHP sold out in 1994 and Shell sold down to 34%. In 2010, Shell further decreased its shareholding to 24%. Woodside has the potential to become the most LNG-leveraged company globally.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Alumina Price Finally Catches Up to Soaring Aluminium Price

Alcoa owns 60% and is the manager of the joint venture. Alumina is effectively a forwarding office for AWAC profits. Its profits stem from its equity share in AWAC, less local head office and interest expenses. While AWAC enjoys a low operating cost position relative to its competitors, the cost curve is relatively flat, and competitive pressures exist via supply from China. 

Alumina was the result of a demerger of WMC’s aluminium assets in 2003. AWAC has substantial global bauxite reserves and alumina refining operations, many of which are in the lowest quartile of the cost curve. AWAC primarily operates across the first two stages in the aluminium production chain: bauxite mining and alumina refining. AWAC’s refineries are, on average, just inside the lowest quartile of the cost curve. Alumina’s cost-efficient refining operations stem from proximity to bauxite mines and access to cheap power. 

Alumina Price Finally Catches Up to Soaring Aluminium Price; No Change to AUD 1.80 FVE

Our fair value estimate for no-moat Alumina is unchanged at AUD 1.80 per share. 

AWAC mined 11.1 million tonnes of bauxite and refined 3.1 million tonnes of alumina, both slightly lower than the June 2021 quarter. However, the gross margin on the alumina side rose 8% to USD 55 per tonne as realised pricing strengthened 4% to USD 292 per tonne. But this strengthening is only a prelude to what can be expected in the fourth quarter, with the average alumina price for the first two weeks of October at USD 410 per tonne. This is broadly as we’d expected given alumina has been wildly out of step with its usual synchronisation to the aluminium price. The latter is soaring at around AUD 1.40 per pound, nearly double the fiscal 2020 average. 

Our mid cycle alumina price forecast is unchanged at USD 315 per tonne and considered to be a healthy price. The global alumina cost curve is a flat one. We think rising energy costs, increasingly capturing the cost of carbon, and favourable demand trends via light-weighting vehicles and via battery market growth, support a healthy mid cycle alumina price. 

Financial Strength 

At end 2020, AWAC had USD 361 million in net cash, marginally improved on 2019’s USD 340 million. At the end June 2021, Alumina had just a position of USD 5.7 million in net debt, also marginally improved. Historically, AWAC reinvested heavily in its operations at the expense of dividend growth. We expect the company to remain largely in maintenance mode, with no major projects planned over the foreseeable future. Therefore, AWAC should pay out most if not all of its operating cash flows in the form of a dividend to Alumina Ltd. and Alcoa. This will help to maintain Alumina Ltd.’s strong financial health. We expect AWAC to remain unleveraged and Alumina to remain modestly leveraged at worst.

Bulls Say 

  • Alumina is a beneficiary of continued global economic growth and increased demand for aluminium via electrification of transport. 
  • AWAC is a low-cost alumina producer. It has improved its position on the cost curve relative to peers through expansion of low-cost refineries and closure of high cost operations. 
  • The amended AWAC agreement ensures that Alumina will be able to maximise value for shareholders and makes it a more attractive acquisition target.

Company Profile

Alumina Ltd. is a forwarding office for Alcoa World Alumina and Chemicals’ distributions. Its profit is a 40% equity share of AWAC profit, less head office and interest expenses. Its cash flow consists of AWAC distributions. AWAC investments include substantial global bauxite reserves and alumina refining operations. Declining capital and operating costs and a lack of supply discipline from China are likely to result in competitive pressures, but Alumina’s position in the lowest quartile of the industry cost curve is defensive.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Air Products contribute long-term contract and high switching cost to gas industries

Industrial gases typically account for a relatively small fraction of customers’ costs but are a vital input to ensure uninterrupted production. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions.

Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points. Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.

Financial Strength

Narrow-moat-rated Air Products announced that it will invest $4.5 billion in a blue hydrogen complex in Louisiana, expected on stream in 2026. The project will produce over 750 million standard cubic feet per day of blue hydrogen. A portion of the blue hydrogen will be injected into Air Products’ existing 700-mile Gulf Coast pipeline network, which is fed by around 25 projects including the firm’s Port Arthur facility (a blue hydrogen project that has been operational since 2013). Air Products recently announced its updated capital deployment plan and aims to invest over $30 billion during the 10-year period from fiscal 2018 to fiscal 2027.

Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program.

Bulls Say’s

  • Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
  • After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
  • The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.

Company Profile 

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Weatherford to benefit from oil market’s recovery from COVID-19

When CEO Mark McCollum came aboard in March 2017, many wondered whether it was the dawn of a new era for Weatherford International. McCollum made solid progress in turning Weatherford around in 2018, with rapid improvement in profitability thanks to the companywide transformation plan. But this improvement wasn’t quick enough for the highly leveraged company’s creditors, which forced Weatherford into bankruptcy in 2019.

Weatherford emerged from bankruptcy in December 2019 having shed most of its debt. Shortly after, the coronavirus oil market downturn battered the company just as it was getting back on its feet. Given many abortive attempts at turning Weatherford around, many investors are refusing to give the company another chance. While McCollum left in 2020, he laid the groundwork for improvement that should be carried on by the company’s new leadership under CEO Girish Saligram.

Financial Strength:

Weatherford’s balance sheet is somewhat weak, but it is expected to ride out the rest of the oil market downturn without major financial distress. Weatherford has about $1.2 billion in available cash and no debt coming due until 2024. The company posted solid free cash flow of $135 million in 2020 despite very weak oil markets. In 2021, the company won’t have the benefit of working capital inflows, but it is still expected to be slightly positive in total free cash flow. In any case, it should have enough liquidity to meet any cash outflows as COVID-19 wreaks havoc on oil markets in 2021. Improving profitability in subsequent years should drive Weatherford solidly into positive free cash flow territory, despite a very heavy interest burden.

Bulls Say:

  • Weatherford has some hidden gems in its portfolio whose value will be revealed with the divestiture of loss-making business lines and streamlining the company. 
  • The company’s managed pressure drilling technology will become increasingly sought after as wellbores move into deeper, harsher environments.

Company Profile:

Weatherford International provides a diversified portfolio of oilfield services, with offerings catering to all geographies and different types of oilfields. Key product lines include artificial lift, tubular running services, cementing products, directional drilling, and wireline evaluation.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Newcrest’s Numerous Development Projects Maturing Nicely; Shares Remain Undervalued

the large resource base, low-cost position, and the company’s record. Barring a dip in fiscal 2024 and 2025, when the company assumes Telfer exhausts, Newcrest expects gold production to remain steady around 2.0 million ounces a year for the next decade based on the projects it has in hand. The outlook for copper production is similarly relatively flat, around 140,000 tonnes a year, but should step up from around 2029 to over 170,000 tonnes a year. Neither outlook–for gold or copper production–sounds too exciting. But beneath that apparent steadiness, the forecasts show how far Newcrest has come to offset the inevitable decline in grade at Cadia and the possible closure of Telfer.

Company’s Future Outlook

Our AUD 29.50 fair value estimate for Newcrest after incorporating the refined development plans for Havieron and Lihir. However, we continue to incorporate it separately into our fair value estimate, and the latest prefeasibility study supports our estimated standalone valuation of about AUD 2.50 per share, which is less than 10% of our overall fair value estimate. The company expects all-in sustaining costs to roughly have by fiscal 2030. In part, that depends on the copper price; Newcrest assumes USD 3.30 per pound longer term, which is above our USD 2.50 per pound assumption from 2025, but nevertheless we expect the company to remain a low-cost gold producer and well placed relative to peers.

We think these deposits have been somewhat forgotten by the market, but they contribute just over 10% to our fair value estimate, and we think the market could reasonably quickly be reminded of the valuable optionality they bring. From the base cases that Newcrest outlined for Telfer, Havieron, and Red Chris, we think the upside potential at Red Chris is likely to be the most substantial of the three, but it’s also longer-dated. The transition from lower-grade open-pit ore to bulk underground mining is expected

Company Profile 

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

New Jersey Resources Infrastructure Upgrades and Clean Energy Support Multiyear Growth Plan

NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities. NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth.

NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2021-24. These projects support aggressive renewable energy goals in New Jersey and other states. NJR also is well positioned to invest in hydrogen and biogas. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage.

Company’s Future Outlook

Our utility earnings growth estimate assumes 1% annual customer growth and $1 billion of capital investment in 2022-24, in line with management’s plan. NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. 

In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. The success of the nonutility businesses and divesture of the wind investments also brought in cash to support its $2.5 billion of total investment in 2020-22. NJR will probably have to raise up to $700 million mostly through debt to help finance what we estimate will be $2 billion of capital investment in 2022-24.NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021.

Bulls Say’s

  • NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey.
  • NJR raised its dividend 9% for 2022 to $1.45 per share, its 28th increase in the last 26 years.
  • NJR’s distribution utility has received two constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.

Company Profile 

New Jersey Resources is an energy services holding company with regulated and non regulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s non regulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

AGL’s Near-Term Outlook Looks Tough, but Earnings are expected to Recover Over the Long Term

Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. At this stage, the announced split is only an internal separation, with more details regarding the future governance, capital structure, and asset allocation expected by June 2021. 

Low-cost electricity generators and gas producers can achieve an economic moat via low-cost production, as AGL has via its low-cost coal-fired generation plants. Wholesale electricity prices are under pressure from falling gas prices, government initiatives to reduce utility bills, and new renewable energy supply. These headwinds are likely to keep AGL’s earnings falling into fiscal 2023.

Financial Strength:

The fair value estimate for AGL is AUD 14.00 per share, which is implied by the fiscal 2022 price/earnings multiple of 32 and an enterprise value/EBITDA multiple of 9. At this valuation, the forward dividend yield is expected to be 2.3% unfranked, with strong long-term growth as earnings recover. Also, the historical dividend yields generated by AGL are phenomenal.

AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, net debt/EBITDA is expected to rise to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. This should raise more than AUD 500 million in equity. Dividend payout ratio is 75% of EPS.

Bulls Say: 

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive. 
  • Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
  • Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Profile:

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

CSR Responds to Structural Changes taking place in Australian Residential Construction

CSR acknowledges and is responding to the structural change taking place in Australian residential construction. Cost of construction is increasing, while detached housing lot sizes decrease and a greater share of total dwellings are multifamily. Higher energy prices are making lightweight building alternatives such as fibre cement and AAC more attractive, while energy-intensive materials like brick are losing their appeal. To this end, CSR has acted to pivot toward lightweight building materials and executed a number of acquisitions to strengthen its positioning.These investments in lightweight building material businesses, including fibre cement and AAC, are part of CSR’s strategy to drive future growth as lightweight building materials, which reduce total building cost, gain greater favour.

Capacity reductions, industry consolidation, and buoyant construction markets have underpinned earnings growth, while high aluminium prices also have been a strong tailwind. This has enabled CSR to earn good but unsustainable returns on invested capital in recent years. Despite strong brands and scale, CSR exhibits sufficient pricing power or cost advantage to yield an economic moat. The balance sheet carries no debt, providing flexibility should acquisition opportunities arise.

Financial Strength 

CSR’s balance sheet remains in a position of undeniable strength, with net cash of AUD 251 million at fiscal 2021 year-end. With dividends reinstated, we forecast full-year ordinary dividends of AUD 0.24 per share in fiscal 2022-a 60% payout of forecast adjusted net profit.Substantial balance sheet flexibility remains in place for CSR. We continue to forecast ample liquidity to fund the businesses operations and with the capacity to fund the retirement of maturing debt facilities through to fiscal 2024. Absent capital management or M&A activity, we forecast a net cash position for CSR through the forecast period.

Bulls Say 

  • Rationalisation of the brick operations has improved profitability in recent years. 
  • Continued strong demand in China could see aluminium prices hold in at current levels. 
  • The balance sheet is in excellent shape, providing flexibility for share buybacks or opportunistic acquisitions amid the COVID-19 downturn.

Company Profile

CSR is one of Australia’s leading building materials companies; it produces plasterboard, bricks, roof tiles, insulation, glass, fibre cement, and aerated autoclaved concrete. Founded as Colonial Sugar Refining Co. in 1855, CSR started producing building materials in 1942 and is behind recognised brands such as Gyprock plasterboard. CSR sold the last of its sugar assets in 2010 to focus primarily on building products. CSR retains a 25% effective interest in the Tomago aluminium smelter and periodically advances surplus industrial land to property developers.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Strong Fiscal 2021 Trends Persist Into First-Quarter Fiscal 2022

While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in nondestructive testing and inspection. Services include laboratory testing for the mineral, coal, environmental, food, and pharmaceutical segments.

Excellent reputation, technical capabilities, a global network, and established relationships with global clients are key advantages over often fragmented competitors.ALS’ global network of more than 350 laboratories provides a geographically diverse revenue base: 37% Asia-Pacific, 36% Americas, 24% EMENA, and the balance Africa. This global network reduces region reliance and gives it the capability to leverage experience across borders and serve an international client base.

Financial Strength

ALS is in only reasonable financial health. At the end of fiscal 2015, acquisitions and capital expenditure had pushed net debt to AUD 776 million and gearing (net debt/equity) to 63%. A subsequent AUD 325 million capital raising meant gearing fell to near 40% and net debt/EBITDA from 2.6 times to a manageable 2.0 times. Incremental acquisitions in the life sciences segment’s EBITDA had been accompanied by a sharp rise in group net debt. This has since been paid down to AUD 675 million at end-March 2021. Somewhat elevated leverage (ND/ND+E) of 36% reflects ongoing incremental acquisitions in the life sciences segment, albeit within the limits of ALS’ sub-45% target ratio. Fiscal 2021 net debt/EBITDA of 1.6 is reasonable.

Bulls Say’s

  • ALS has diversified the earnings base to mitigate exposure to highly cyclical commodity markets. Expansion into food and pharma testing, as well as inspection and certification markets, should provide growth despite a significant slowdown in minerals testing.
  • Large clients are unlikely to move away on price alone, with quality and skills essential requirements.
  • Exposure to mineral and coal testing could once again provide earnings growth if the global economy’s appetite for commodities increases.

Company Profile 

Founded in the 1880s and listing on the ASX in 1952, ALS operates three divisions: commodities, life sciences, and industrial. ALS commodities traditionally generated the majority of underlying earnings, providing geochemistry, metallurgy, inspection and mine site services for the global mining industry. Expansion into environmental, pharmaceutical and food testing areas and commodity price weakness have lessened earnings exposure to commodities.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.