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Intertek - organic revenue growth across the board

Nicholas Hyett | 26 November 2019 | A A A
Intertek - organic revenue growth across the board

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Intertek Group plc Ordinary 1p

Sell: 5,506.00 | Buy: 5,512.00 | Change 40.00 (0.73%)
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Intertek saw revenues rise 4.5% at constant exchange rates over the four months July-October, and now stand at £1bn. Organic revenue growth of 3.6% was a key contributor, with a particularly strong result in Resources.

Intertek shares were broadly unmoved in early trading.

View the latest Intertek share price and how to deal

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.

Intertek's services help companies prove they comply with new requirements. Its rapidly expanding assurance division means 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 saw a few acquisitions last year, 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 labour intensive nature of the core business' means progress beyond last year's 17.2% is likely to be steady rather than spectacular.

Intertek trades on a price to earnings ratio of 25, but its long run average is around 20.

We don't think that premium comes from extra growth - forecasts are steady and the business is doing much the same as 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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Third Quarter Results

The Product division saw revenues rise 3.9% to £632.9m, with organic revenue growth of 2.6%. The division saw growth across all units except Softlines, where new product launches were delayed, and Chemicals & Pharma, which continues to face tough comparators following the introduction of new regulatory standards last year.

Revenues rose 3.6% in Trade to £233.2m, with organic revenue up 3.5%. While the cargo inspection and agriculture businesses both performed well, the Government & Trade services business reported double digit growth.

Resources revenue rose 7.6% both on a reported and organic basis, to £178.8m. The division benefited from increased exploration and production activity among clients.

Intertek expects to deliver organic revenue growth across all three business areas this year, with margin improvements and strong cash generation at a group level. Guidance for net debt of £670-700m at year end remains unchanged, assuming no significant acquisitions or currency movements.

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