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Intertek - Another solid performance

Nicholas Hyett | 23 May 2019 | A A A
Intertek - Another solid performance

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Intertek Group plc Ordinary 1p

Sell: 4,252.00 | Buy: 4,254.00 | Change 24.00 (0.57%)
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Intertek saw revenue rise 5.3% in the first four months of the year, to £924.3m, with organic growth of 3.3% and the remainder from acquisitions. The group remains on target to meet full year targets.

Intertek shares fell 1.4% in early trading.

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Our view

Intertek tests and certifies the quality of a plethora of products, from children's toys to huge 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 13% between 2010 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, above its long run average of more like 19.6. We think that reflects its strong track record, good growth prospects and resilient revenue streams. The potential for modest margin gains, underpin analysts' forecast for rising profits in the coming years.

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First Quarter Results

The Product division saw revenues rise 5.5% to £549.7m, with organic revenue growth of 2.6%. The division saw good growth across all units except Chemicals & Pharma, reflecting a tough comparator last year from the introduction of new regulatory standards.

Revenues rose 6.5% in Trade to £216m, with organic revenue up 5.3%. Resources revenue rose 2.9%, both on a reported and organic basis, to £158.6m. The division benefited from an uptick in exploration and production expenditure by customers.

The group has completed four acquisitions in the past year, adding £17.9m to revenue during the period. Guidance for net debt of £670-700m at year end remains unchanged, assuming no significant acquisitions or currency movements.

Intertek expects good organic growth this year, with moderate margin improvements and strong cash generation.

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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.


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