Treasure Chest: ALS Has A Turn-Around Option

This story features ALS LIMITED. For more info SHARE ANALYSIS: ALQ

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea is ALS Ltd.

Whose Idea Is It?

Analysts at Jarden

The subject:

ALS Ltd and its struggling Nusivan earnings

More info:

At its AGM in July, ALS Ltd ((ALQ)) guided to $150-155m for the first half FY24, some -5% below broker consensus, largely reflecting the underperformance of Nuvisan. ALS acquired a 49% stake in Nuvisan, a European pharmaceuticals testing business, in August 2021.

Following the AGM, Macquarie (Outperform) noted ALS’ broader business remained resilient, featuring strong revenue growth in Environmental and margin expansion across all regions. The broker foresaw some short-term headwinds for FY24 before earnings growth resumes in FY25, with the company maintaining attractive long-term growth prospects.

Morgans anticipated downside risk for earnings in the Commodities division given a volume decline and macro-economic uncertainty, but believed the stock offered value, and maintained an Add rating.

Jarden believes a turning point is approaching, given options, both call (right to buy) and put (right to sell), in ALS' favour exercisable from January 1.

Using Nuvisan's pre-acquisition accounts to get a sense of the revenue and margin mix prior to ALS' acquisition, Jarden notes a predominant revenue skew to Clinical Trials, being some 50-60% of total Nuvisan revenue, which has been impacted by lower levels of activity through 2023 relative to 2021 highs.

With the need for more decisive cost-out in the Nuvisan business to restore earnings margins back to pre-acquisition levels, Jarden sees strong motivation for ALS to acquire the remaining 51% of Nuvisan from January 1, which the broker would see as a positive catalyst.

Jarden estimates this scenario could boost Life Sciences' underlying earnings forecasts by 10% in FY25 and drive group core EPS accretion of 1.5%. Further, Jarden estimates 3% upside to consensus core EPS estimates in this scenario.

Following an update to its Commodities testing outlook over the second half FY24 to FY26, the broker lifts its core EPS forecast 3% over the period. Alongside this, and following movements in ALS' share price and updating global peer valuation multiples in its sum-of-the-parts valuation, Jarden’s target price lifts to $13.40 from $11.50. The broker upgrades to Buy from Neutral.

Jarden suggests the current share price provides good risk/reward for investors now that consensus estimates have been reset lower, hence a more positive investment stance towards the stock.

Following the AGM, Macquarie cut its target to $12.80 from $13.20 and Morgans to $13.35 from $13.75.

The four brokers covering ALS Ltd and monitored daily by FNArena have a consensus target of $11.66, but Ord Minnett has not updated on the stock since June, when it upgraded to Lighten from Sell and set a target of $8.40. UBS (Neutral, $12.10) has not updated since the FY23 result release in May.

ALS Ltd will report first half FY24 results in November.

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