Virus slices into ALS dividends, but tests on horizon

Coronavirus has carved into dividends at testing giant ALS while helping trigger a $90 million hit to values of operations including in pandemic-afflicted Brazil.

The hit was partly to goodwill in ALS’s life-science division in Latin America of $50 million, given rising socioeconomic tension in countries such as Brazil and Peru, and currency devaluation.

COVID-19 had further squeezed work for ALS’s industrial division, which conducts inspection work on facilities such as oil rigs, causing a $40 million charge against goodwill.

The pandemic was also blamed for a 10 per cent drop in revenues at Brisbane-based ALS in April, compared to the same time a year earlier. That is even with the revenue line theoretically boosted after ALS, with 15,000 staff in 65 countries testing everything from coal to food samples, made acquisitions in the past year.

The company last month stood down 2300 staff in response. But some silver lining came with ALS examining potential long-term testing work for areas such as viruses.

It has already worked in swab testing. “We’re also doing a program [around] environmental monitoring so we would actually go onto a plane, cruise boat, office … and provide recurring testing on - just not only COVID-19 - but a variety of viruses,” ALS chief executive Raj Naran said on Wednesday.

He was guarded on any specific overall earnings guidance but said he believed this current quarter should be the worst for the company.

“I think it will be a bit of a stop-start [recovery] and then a gradual improvement in the overall businesses,” he said.

Mr Naran was speaking as ALS unveiled earnings for the 12 months to March 31. On its preferred basis of underlying profits from ongoing operations, ALS was within guidance of a 4.3 per cent rise to $189 million. Margins were squeezed.

Statutory profits fell 16.3 per cent to $127.8 million, which included the mixed impacts of the impairment and profits from selling divisions in the year.

The final dividend was cut from 11.5¢ per share last year to 6.1¢. “With the coronavirus pandemic, our focus was really on business resilience and managing liquidity,” Mr Naran said.

It came after Paris-based rival Bureau Veritas in April cancelled a €250 million dividend ($420 million) payout to comply with French assistance regulations and warned the pandemic would have a “very significant impact” on quarterly results.

Mr Naran said ALS’s proportionally smaller dividend hit was a result of rivals having larger exposure to areas such as consumer testing and field inspections.

Jamie Nicol, chief investment officer at funds manager DNR Capital, said ALS’s hitting of earnings guidance, given the pandemic was starting to bite in March, was a good outcome.

Other positives included growth in the life-sciences business, whose underlying earnings before interest and tax rose 15.7 per cent to $143.9 million, he said. Negatives included a tough outlook for the industrial testing division, whose underlying EBIT was up 13.1 per cent to $24.2 million.

Mr Nicol said increasing rules and health concerns for businesses held some promise for ALS. “In the long run, I think regulation is going to increase for food testing, surface testing,” he said.

Revenues rose in ALS’s commodities division but underlying EBIT dipped 3.1 per cent to $162.5 million. That was due to a drop off in the higher margin work testing sample flows for mining exploration, which declined 9 per cent compared to a year earlier.

Mr Naran also said no material contract losses had spurred from a scandal in its Australian coal inspection business. Following initial queries from The Australian Financial Review, ALS initiated an internal investigation and told the sharemarket nearly half of all coal-sample certificates had been artificially boosted since 2007.

It has referred the misconduct to NSW Police, and ALS was subsequently blacklisted as a testing laboratory by Korea South-East Power, a subsidiary of the NYSE-listed Korea Electric Power Corporation.

The AFR can reveal a second large power company, Korea Midland Power, also this month banned ALS.

“ALS … is not allowed as an international independent inspection agency,” Korea Midland, also a KEPCO subsidiary, said in tender documents for an upcoming bid of 480,000 metric tonnes of coal.

Mr Naran said while some revenue had been lost “we are seeing other clients give us some additional shipments because of our transparency and some of the corrective actions and improvements we’ve made to the coal [certification] business”.

Mr Naran, whose bonus was trimmed because of the scandal but still earned $3 million, said he could not speculate on whether other industry players were involved in manipulating results.

Multiple industry sources have said boosting results is a long-running problem, with suspicion ranging from it being endemic, to the exception rather than norm in the sector.