ALS: Slowdown in Commodities but There Is Growth Potential in Life Sciences

We maintain our fair value estimate of AUD 8.40 for no-moat-rated ALS ALQ, with the materials testing specialist screening as still materially overvalued. ALS shares are down 6% year to date, and the share prices of global competitors in the nondestructive testing and inspection space such as Bureau Veritas, SGS, and Intertek have followed a similar path due to a softer outlook in the mining industry.

We expect a continuing slowdown in the commodities business unit through fiscal 2024. The segment experienced stellar growth over the last two years, following a boom in the mining sector driven by postpandemic financial stimulus and a subsequent demand bump. Increasing demand for battery minerals and other future-facing commodities can benefit the commodities segment in the long run. However, the near-term market dynamics have not significantly changed to warrant an update to our forecasts. We forecast a 10-year adjusted EBITDA CAGR for the commodities segment of just 1%.

However, the life sciences division exhibits less cyclicality than commodities, providing a more stable earnings stream for ALS. Management plans to expand life sciences operations to account for 60% of group revenue by fiscal 2027, up from 55% in fiscal 2023. We forecast a 10-year adjusted EBITDA CAGR for the life sciences segment of more than 10%.

Our adjusted EPS forecast for fiscal 2024 is AUD 0.61, and our AUD 0.37 DPS forecast equates to a part-franked yield of 3.2% based on the current share price.

Our fair value equates to a fiscal 2028 EV/EBITDA of 7.9, a P/E of 14.3, and a dividend yield of 4.2%, assuming a 60% payout ratio. That is at the high end of the company’s targeted 50% to 60% payout of underlying net profit after tax. We assume a five-year group EBITDA CAGR of 3.5% to AUD 685 million at a midcycle EBITDA margin of 22%.