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Intertek - continued progress

George Salmon | 1 August 2019 | A A A
Intertek - continued progress

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Intertek Group plc Ordinary 1p

Sell: 6,096.00 | Buy: 6,098.00 | Change 12.00 (0.20%)
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Intertek has released half year results that show underlying increases in both revenue and profits. In line with the policy to pay out around half of earnings, the interim dividend is also increased, up 7.2% to 34.2p per share.

The shares rose 2.5% on the news.

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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 has seen UK trademark registrations jump in recent years. And the most recent data shows the appetite for new brands continues to grow. It's a similar story the world over, which suggests the Product and Trade divisions will be kept busy for years to come, although a possible China-US trade war has the 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 profits are starting to rise, albeit from a low base.

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 last year's 17.2% is likely to be steady rather than spectacular.

Intertek trades on a price to earnings ratio of 26, but its long run average is a shade under 20.

We don't think that premium comes from extra growth - forecasts are steady and the business isn't doing much different to what it's always done. Instead, we think it reflects a trend for investors to seek out companies with strong track records, good growth prospects and resilient revenue streams in a time of uncertainty.

We think Intertek fits that description, but of course there are no guarantees it'll deliver in the future. Our main worry is that if preferences change the group could lose its premium tag without doing much wrong.

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Half year results

Over the six months to 30 June, group revenue was £1.4bn, up 7%. With 2.1% due to favourable exchange rates movements and another 1.9% from acquisitions are excluded, underlying organic growth was 3%. As expected, growth was broad based across all three of the group's major divisions.

Operating profits were £243.6m, up 6.8% at constant exchange rates with margins increasing from 16.6% to 16.9%. That reflects the group's acquisitions in higher margin areas and underlying improvements.

Within the dominant Products division, revenue rose 7.6% to £866.8m, with underlying growth 2.1%. All subdivisions including apart from Chemicals & Pharma delivered growth. Adjusted operating profits rose 6% to £184.9m.

The Trade division delivered revenue of £332.7m (underlying growth of 5.1%) and adjusted operating profit of £44.2m, up 6.8%. Improved margins in Resources helped adjusted profits grow 16.9% to £14.5m, on revenue of £243.1m.

Innovations during the period included developments to assist with remote auditing software, infrared analysis of chemical testing, and oil quality tests.

Looking ahead, the group says it remains on track to deliver its 2019 targets of good organic revenue growth in all three divisions, moderate margin expansion and strong cash conversion.

Intertek's net debt position debt increased to £1.1bn from £568.1m last year, however much of that increase was due to accounting changes.

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