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ALS faces a difficult 2023-24 amidst revenue challenge

The 2023-24 fiscal year has been tough for the Brisbane-based global testing group, ALS (ASX:ALQ). The first half, ending in September, saw a slight rise in revenue followed by a drop in earnings. This trend continued as the interim dividend was trimmed after the unexpected departure of the CEO just before the end of the 2022-23 financial year.

Directors anticipate a continuation of these challenges into the second half of 2023-24. Overall, the company’s performance has remained stagnant, with a focus on finding ways to boost revenue in a lackluster global economy while controlling costs.

The interim dividend, now at 20%, was previously unfranked a year ago, resulting in a payout of 19.6 cents per share, down from 20.3 cents in the previous year. Directors attribute this lower payout to a payout ratio of 59.9% of the first half’s underlying continuing net after-tax profit, falling within the reference range of 50-60% of underlying continuing net after-tax profit.

The breakdown of revenue gains reveals that the company struggled to find growth in the first half. Organic revenue growth contributed 0.7% to the uplift, with acquisition growth contributing 2.9%, and a positive FX impact of 3.8% due to depreciation of the Australian dollar against major currencies (Euro, Pound Sterling, and US dollar) during H1 FY24. The revenue growth was primarily driven by the Environmental business and the Commodities division, according to directors.

The company’s challenges appear to be budgeted for the next six months, as the 7.4% increase in continuing revenue resulted in a 2% dip in underlying earnings before tax and a 9.4% slide in after-tax profit to $133.5 million. Margin protection was a struggle, with margins dropping 161 points to 19.1% in the first half, and the company expects this situation to persist into the second half of 2023-24 ending on March 31.

In the outlook statement for the rest of the year, directors anticipate ALS delivering a FY24 underlying NPAT of between $310 to $325 million, representing a modest 1% decrease (at the midpoint) compared to FY23. Modest organic revenue growth is expected at the Group level, with a continued focus on effective price management. The company also aims to improve margins further within the Food and Pharmaceutical businesses and remain disciplined in executing value accretive transactions.

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