For clients that have elected the “Growth” Australian equity option we bought ALS Ltd (ALQ)

ALS is one of the world’s largest and most diversified analytical testing service providers, with sites strategically located in more than 350 locations in 55 countries to provide accurate and timely services. The company operates three divisions focused on end markets – Commodities, Industrials and Life Sciences.

We are positive on the outlook for the company for the following reasons:

  • it enjoys a strong brand, has extensive technical capabilities and a global network that provides scalability
  • the deliberate targeted expansion across the non-cyclical Life Sciences division and more resilient inspection and asset care markets is an attractive strategy
  • stricter safety and tighter regulatory requirements combined with targeted acquisitions will drive continued growth in the Life Sciences division
  • gearing is at a comfortable level with further improvements to the balance sheet expected
  • the company is well positioned for an eventual recovery in global resource exploration and better placed to weather the current environment than smaller competitors
  • it is “in play” following an unexpected offer, with scope for an improved bid and/or competing offer

Whilst any renewed weakness in commodity markets could hamper an earnings recovery and there is downside risk to the share price should a takeover deal not materialize, we feel recent challenging conditions have created an opportunity to buy at the low point of the cycle and that there is good value to be realised over the medium term as business conditions improve.

To fund the purchase of ALS we will be selling Ansell (ANN) on which we remain positive in the medium term as the company should benefit from an increasing focus globally on workplace safety standards and medical hygiene. With many of the latter’s products exposed to the industrial cycle we do however expect softer organic growth near term, but without the potential earnings volatility of ALS due to its resource sector exposure. This in our view makes Ansell better suited to the ‘Blend’ Australian equity option.

If you have any queries, please contact your Elston adviser.