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Morningstar | No-moat ALS Shares Jump on 1H Profit Guidance. No Change to FVE

We make no change to our AUD 3.85 per share fair value estimate for no-moat ALS Limited. That is despite the company guiding for slightly higher than expected first-half fiscal 2019 underlying net profit after tax, or NPAT. There is little to indicate our longer-term assumptions warrant meaningful change. We increase our first-half NPAT forecast by 2% to AUD 85 million from AUD 83 million, to the low end of the AUD 85-90 million guidance range. Our full-year fiscal 2019 EPS forecasts increases by 3% to AUD 0.35 from AUD 0.34. ALS says it is seeing positive returns and growth in its environmental, food, pharmaceutical, geochemistry and tribology businesses and first-half profit guidance is 20%-25% above the previous corresponding half. But profits from asset care businesses remain flat with conditions tough.

ALS shares jumped by 11% to AUD 8.30 on the profit guidance, and at that level, are more than double our assessed fair value estimate. That price translates to a P/E of 22-24 on annualised first-half 2019 earnings guidance, too high given our outlook. Our fair value estimate equates to a more conservative fiscal 2023 EV/EBITDA of 7.3, P/E of 13.3, and dividend yield of 4.5%, all discounted at weighted average cost of capital. In nominal terms, the P/E and yield improve to 8.5 and 7.1%, respectively, based on our fair value estimate. We think this aggressive enough, particularly given our already bullish outlook.

We forecast group EBITDA to grow at a five-year CAGR of 6.5% to AUD 372 million by fiscal 2023, or 5.7% growth after adjusting for sale of the struggling energy segment in fiscal 2018. This includes strong 13.5% growth for life sciences, modest 1.0% growth for industrial including tribology, but minus 4.0% for minerals in line with our forecast for declining commodity prices. We think the share price implies a market factoring-in five-year group EBITDA CAGR of 17.5%.

This quantum of EBITDA CAGR and more was regularly achieved by ALS during the halcyon days of the China resources boom. But we think it will be more difficult to replicate on a far larger earnings base, and from life sciences rather than geochemistry. Competition in the nondestructive testing space is not in short supply, including from majors like Bureau Veritas, SGS, and Intertek.