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Intertek - new dividend policy boosts returns

George Salmon | 5 March 2019 | A A A
Intertek - new dividend policy boosts returns

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Intertek Group plc Ordinary 1p

Sell: 6,064.00 | Buy: 6,066.00 | Change 28.00 (0.46%)
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Intertek's full year results show steady revenue and profit growth, but the pace of progress is slightly behind what some had expected.

The shares moved 2.8% lower on the news.

In line with the new dividend policy of paying out around half of earnings, the full year dividend rises 39% to 99.1p per share.

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Our view

Intertek tests and certifies the quality of a plethora of products, from children's toys to grizzly oil and gas components. There are a few reasons we think that's a nice position to be in.

Continued product innovation saw UK trademark registrations jump almost 30% between 2016 and 2017, and the appetite for new brands continues to grow. It's a similar story the world over, and that suggests the Product and Trade divisions will be kept busy for years to come, although a possible China-US trade war has potential to stunt growth.

It's not just new products that offer a tailwind. Food manufacturers now need to provide more information on the products they sell, from gluten content to calorie count. Safety checks are getting tighter in many other industries too, and a drive to combat climate change means emissions and pollution levels are under the spotlight.

Companies need Intertek's services to prove they comply with new requirements. Through its rapidly expanding assurance division, it's able to make money in an advisory capacity too.

The part of the business geared towards natural resources is more cyclical, and profits drained away on the back of the oil price crash. But with oil majors stepping up spending again, there's hope for a recovery.

The strategy going forwards calls for a shift towards higher-growth, higher-margin businesses. That's seen the group buy staff management business Alchemy, and with leverage as measured by net debt to EBITDA below target range, further M&A is a possibility. Any deals would presumably be margin accretive, although the core business' labour requirements mean progress beyond the current level of 17.2% is likely to be steady rather than spectacular.

Intertek trades on a price to earnings ratio of 24.2, above its long run average of more like 19.4. We think that reflects its strong track record, good growth prospects and resilient revenue streams. These factors, and the potential to inch margins up, underpin analysts' confidence that profits can rise by over 8% a year in 2019 and 2020.

A new dividend policy of paying out half of earnings means investors can expect that to feed through to a rising dividend, although there are no guarantees. This year's prospective yield is 2%.

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Full Year Results

Underlying group revenue rose 3.7% at constant exchange rates, to £2.8bn. With margins rising 40 basis points to 17.2%, adjusted operating profit rose 6.9% to £481.8m, after excluding £45.6m of restructuring and acquisition costs.

Growth was driven by the dominant Products business, where organic revenue rose 5.2% to £1.7bn. Progress was broad-based, with robust growth in Foods, Chemicals and Building & Construction. Margins rose 0.6 percentage points, helping adjusted profits grow 9.5% to £371m.

Elsewhere, a weaker sales mix led profits down 1.3% to £83.4m in the Trade business, despite underlying revenue growth of 2.2%. In Resources, underlying revenues were stable, with profits broadly unchanged at £27.4m.

The improved profitability of the group helped free cash flow improve from £341.6m to £350.6m. However, net debt rose £234m to £778m, reflecting a higher acquisition spend and adverse exchange rate movements on foreign currency denominated debt.

Looking ahead, the group has described the growth prospects for 2019 as 'solid' or 'good' in all three divisions.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.