Rising ESG Requirements And Automation Will Erode Testing Demand

Key Takeaways

• Rising automation and self-sufficiency in client industries threaten ALS's core revenues, requiring expensive technological upgrades and risking declining margins.
  
• Exposure to mining cycles, tighter regulations, and intensifying competition jeopardize growth prospects and could further squeeze profitability and operational efficiency.
  
• ALS is positioned for sustained expansion and margin growth through demand in minerals and environmental testing, industry outsourcing, strategic investments, and digital transformation.

Catalysts

Engages in the provision of professional technical services primarily in the areas of testing, measurement, and inspection in Africa, Asia Pacific, Europe, the Middle East, North Africa, and the United States.

• ALS faces significant long-term risk from ongoing advancements in at-source, client-controlled testing and automation, which could lead to a structural reduction in third-party laboratory demand, eroding the company's core revenue base and leading to declining organic growth across its largest business lines.
  
• Increased digitization, automation, and data integration across resource, manufacturing, and food sectors may accelerate industry-wide self-sufficiency in testing and analysis, forcing ALS into costly technology upgrades merely to maintain relevance, likely resulting in depressed net margins and persistently high capital requirements.
  
• Heavy reliance on the mining sector leaves ALS structurally exposed to future commodity price downturns, project cancellations, and reduced exploration budgets-especially as de-globalization and supply chain re-shoring diminish the need for extensive cross-border testing-putting medium
• to long-term pressure on both revenue and EBIT growth.
  
• The company is facing growing compliance costs due to intensifying global ESG and regulatory requirements, while tighter regulation in multiple jurisdictions will continue to compress margins and increase operational complexity, particularly in Environmental and Life Sciences segments.
  
• Ongoing industry consolidation among ALS's client base, as well as heightened competition in high-growth verticals like food and pharma, is expected to increase client bargaining power, trigger price wars, and ultimately depress earnings, making top-line growth projections appear overly optimistic given the company's current strategic positioning.

ALS Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ALS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ALS's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 12.1% in 3 years time.
• The bearish analysts expect earnings to reach A$434.0 million (and earnings per share of A$0.85) by about August 2028, up from A$256.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, down from 37.4x today. This future PE is lower than the current PE for the AU Professional Services industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

ALS Future Earnings Per Share Growth

Risks

• Global megatrends such as the energy transition and electrification are driving increasing demand for battery metals and critical minerals, which supports long-term growth in ALS's Minerals testing services and underpins resilient revenue opportunities.
  
• Heightened global regulatory scrutiny, particularly around environmental and food safety testing (e.g., PFAS regulations), is leading to sustained and growing demand for independent laboratory analysis, supporting ALS's Environmental segment revenue and margin resilience.
  
• Ongoing industry shift toward outsourcing of Testing, Inspection, and Certification (TIC) services is expanding ALS's total addressable market, positioning the company to benefit from sector-wide growth and margin expansion.
  
• ALS's execution of large-scale brownfield investments in key laboratory hubs and its continued bolt-on acquisition strategy are increasing operational scale, market leadership, and service capability, enabling potential double-digit revenue CAGR and sustainable long-term earnings growth.
  
• Strategic investments in digitalization, automation, and advanced proprietary technology are expected to drive further efficiency, operating leverage, and net margin improvements, allowing ALS to capture greater value as volumes grow and industry complexity increases.

Valuation

• The assumed bearish price target for ALS is A$12.78, which represents two standard deviations below the consensus price target of A$17.77. This valuation is based on what can be assumed as the expectations of ALS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$20.5, and the most bearish reporting a price target of just A$11.1.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$3.6 billion, earnings will come to A$434.0 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$18.9, the bearish analyst price target of A$12.78 is 47.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.