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Intertek - resilient first quarter

Emilie Stevens, Equity Analyst | 21 May 2020 | A A A
Intertek - resilient first quarter

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Intertek Group plc Ordinary 1p

Sell: 6,064.00 | Buy: 6,066.00 | Change 58.00 (0.97%)
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First quarter revenue of £881.6m was 4.9% lower than last year, largely reflecting coronavirus related supply chain disruption. Intertek's two largest divisions, Products and Trade, saw revenues decline but revenues rose in the Resources division.

Intertek said it's too soon to give full year guidance, and will provide an update once there is better "visibility on when and how the lockdown restrictions will be lifted around the world".

The shares rose 8.2% over morning following the announcement.

View the latest Intertek share price and how to deal

Our view

Intertek makes most of its money testing and certifying the quality of products and components - everything from children's toys to huge oil and gas components.

And despite some inevitable disruption caused by coronavirus, Intertek's diverse offering and global customer base has proven its resilience. It continues to show riding the global regulation wave is a good place to be.

Continued product innovation underpins the group's largest division. And while global lockdowns are hindering performance at the moment, that's been somewhat offset by a rise in pandemic equipment testing. So far there's nothing to suggest the demand for new products has fundamentally reduced.

It's not just new products that offer a tailwind. Safety checks across industries have been getting tighter and with services to help companies prove they comply with new requirements Intertek is well positioned to help. Food manufacturers and emission reduction have been areas of growth so far but new pandemic protocols could also provide a boost too.

The part of the business geared towards natural resources tends to be more cyclical, and profits drained away on the back of the oil price crash. Yet despite the severity of the latest oil price crash, revenues haven't followed suit. Exploration and production revenues actually grew over the quarter and so did the Minerals business - boosted by Australian iron and gold mining.

Over the longer term the group's strategy calls for a shift towards higher-growth, higher-margin businesses. But we expect progress here is likely to be on hold for now.

While Intertek's earnings are holding up well so far, the outlook remains uncertain. A strong balance sheet is even more important than usual which is why it's reassuring Intertek entered the crisis in good shape. Net debt was £629m, just 1 times the level of cash profits (EBITDA). The group has access to borrow more if needed. It doesn't seem like Intertek's in need of this support now, but if conditions sour, even the best balance sheets will come under strain.

As things stand we don't have concerns about Intertek's ability to survive the current crisis, but the uncertainty means we can expect ups and downs from here. The bigger question is how long it will take for growth the get back on track. Investors should keep in mind the shares change hands for 26.8 times expected earnings, which is significantly above the longer run average and doesn't leave much room for error.

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First quarter trading details

Revenues in Intertek's largest division, Products, fell 6.6% to £519.9m. The division, which tests and certifies products across a range of businesses globally, suffered as the pandemic disrupted most client's businesses and supply chains.

Trade revenues dropped 5.9% to £200.8m. Within this division, Caleb Brett, which inspects large commodity shipments saw revenues decline due to lower demand. Government cargo revenues also declined, reflecting manufacturing disruption in China. However revenues were stable in Argi World, which focusses on inspections in the global food supply chain.

Resources revenues were up 2.4% at £160.9m. The rise reflects increased demand for exploration and production inspections and iron ore inspection in Australia.

The group has adapted its product offering to the current pandemic, prioritising coronavirus critical work such as ventilator or PPE inspections. It launched 'Protek' a service to inspect employers' health and safety protocols both in the office and for work from home environments. Remote Video Inspection allows the group to continue to inspection service across the oil and gas supply chain while restrictions are in place.

The group has put in place a number of cash saving initiatives which include a recruitment freeze, a 6 month delay on salary increases and furlough activities in the UK, France and Italy.

Intertek has access to undrawn credit facilities of around £325m and is eligible to borrow from the UK's Covid Corporate Financing Facility if needed.

At the end of 2019, the Group had net debt of £629m, equivalent to 1 times the level of cash profits.

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