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Intertek - a good year but next year could look different

Emilie Stevens, Equity Analyst | 3 March 2020 | A A A
Intertek - a good year but next year could look different

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Intertek Group plc Ordinary 1p

Sell: 5,504.00 | Buy: 5,510.00 | Change -4.00 (-0.07%)
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Intertek's underlying revenue rose 3.3% to £2.9bn, reflecting growth in all business areas. Operating profits were up 5.2% at £513.3m, with growth in the Products and Resources businesses offsetting lower Trade profits.

The board proposes a final dividend of 71.6p, which brings the full year dividend to 105.8p, up 6.8% on last year and in line with the target to pay out around 50% of profits to shareholders.

Intertek expects the coronavirus outbreak to impact next year's results, although it's too early to quantify the impact.

Intertek shares rose 1.8% 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. It does this across the globe and there are a few reasons why we think riding the global regulation wave continues to be a good place to be.

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.

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 and its 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.

While a global customer base means Intertek can benefit from a range of growth trends, it also leaves them exposed to a wider range of risks. China-US trade wars have stalled some areas of the business, while the outbreak of coronavirus provides a textbook example of the risks that come with working with global supply chains. Greater China accounted for nearly a fifth of last year's revenues and while we know there's been significant disruption over the last few weeks, the back log of orders remains which suggests a catch up over the long term.

Over the longer term the strategy calls for a shift towards higher-growth, higher-margin businesses. That's meant fewer acquisitions but with leverage as measured by net debt to EBITDA of 1.4, towards the lower end of the 1.3 to 1.8 target range, further M&A remains a possibility. Intertek look for companies that could improve its profit margins further, although the labour intensive nature of the core business means progress beyond 2018's margin of 17.2% is likely to be steady rather than spectacular.

Intertek trades on a price to earnings ratio of 24, but its long run average is around 20.

While this premium reflects expectations that Intertek will continue to grow faster than the global economy overall, we think a backdrop of wider market uncertainty is also a contributing factor. Investors have been seeking out companies with strong track records, growth prospects and resilient revenue streams. Intertek fits this description but its premium price tag doesn't leave much room for error.

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Full Year Results (underlying and in constant currency)

Intertek's largest division, Products, grew revenues by 2.3% to just over £1.7bn. That reflects broad-based revenue growth across business lines and geographies, which together with good cost control, saw margins improve slightly to 22.2% and operating profits rise 5.7% to £398.6m.

Trade revenues rose 4.1% to £671.3m. However, operating profits dipped slightly to £83.5m - reflecting a weaker product mix and challenging trading conditions for Caleb Brett (a commodity inspection business). Trade margins declined 0.6 percentage points to 12.3%.

The Resources division saw revenues rise 5.7% to £510.9m with operating profits rising 16% to £31.2m. Margins improved half a percentage point to 6.1%. The progress reflects increased exploration and production activity among clients together with new client wins, and strong growth in Mineral testing.

Intertek's free cash flow improved to £380.0m, up from £350.6m - reflecting higher cash generated by operations. This improvement together with lower acquisition activity, meant underlying net debt finished the year £148.8m lower. However, a change in accounting policy meant total net debt actually rose in the year to £875.4m.

Prior to the outbreak of corona virus Intertek were targeting organic revenue growth across all divisions with moderate margin improvements. However, the group now expects next year's performance to be disrupted.

Find out more about Intertek shares including how to invest

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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 disclosure for more information.