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Intertek - revenue resilient, inflexible costs hit profits

Emilie Stevens, Equity Analyst | 31 July 2020 | A A A
Intertek - revenue resilient, inflexible costs hit profits

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Intertek Group plc Ordinary 1p

Sell: 5,482.00 | Buy: 5,486.00 | Change 28.00 (0.51%)
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First half like-for-like revenue of £1.3bn was 8% lower than last year, as the Products and Trade divisions were hit by continued disruption to supply chains and temporary customer business closures.

Total operating costs were roughly the same as last year, which saw operating margins drop 4.6 percentage points to 12.6%. That meant operating profits came in 32.2% lower at £168.2m.

The group expects performance to improve in the second half of the year but is unable to provide detailed guidance.

Intertek announced an interim dividend of 34.2p, in line with last year.

The shares fell 2.8% 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, so far there's nothing to suggest the demand for new products has fundamentally reduced. Building & Construction industries are holding up well, as is work in ethical supply chains.

Safety checks across industries were already getting tighter and the pandemic is likely to amplify this. With services to help companies prove they comply with new requirements, Intertek is well positioned to help.

The part of the business geared towards natural resources tends to be more cyclical. Yet despite the severity of the latest oil price crash, revenues haven't followed suit. Exploration and production revenues actually grew over the first half, as did the Minerals business.

While Intertek's earnings are holding up well so far, there's still risk of further disruption. But the group has a strong balance sheet with net debt under control and 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.

Over the longer term the group's strategy calls for a shift towards higher-growth, higher-margin businesses. Unfortunately it seems progress here is on hold for now.

Intertek continues to prove its resilience, as a diverse and operationally sound business. We don't really have any doubts about its survival of the current crisis. But we do have concerns about how long it will take for growth to get back on and exceed previous levels. The shares currently change hands for 31 times expected earnings, way above the longer run average of 21, and leaving little room for disappointment.

Intertek key facts

  • 12m forward Price/Earnings ratio: 31.0
  • Ten year average 12m forward Price/Earnings ratio: 20.8
  • Prospective yield: 1.8%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Half Results

Revenues in Intertek's largest division, Products, fell 8.4% to £800.3m with underlying operating profits falling 28.3% to £135.5m. The division, which tests and certifies products across a range of businesses globally, suffered as the pandemic disrupted supply chains, particularly in China and India, and saw the temporary closure of businesses globally.

Trade revenues dropped 10.2% to £294.7m, with underlying operating profits of £20.1m, which were down 54.6%. Within this division, Agri World, which focusses on inspections in the global food supply chain, revenues were stable. However, Caleb Brett, which inspects large commodity shipments, saw lower client demand and Government cargo revenues also declined, reflecting manufacturing disruption in China and lockdowns interrupting cross border trade.

Resources revenue declined 2.2% to £235.6m and operating profits fell 15.4% to £12.6m. That reflects an increased demand for E&P and mining inspections, offset by a decline in operational checks due to lockdown closures.

Intertek's capital expenditure was £33.9m (2019: 46.2m) and went towards laboratory expansions, new technologies and equipment.

Despite lower profits and the continued investment, free cash flow generated by the group rose 35.7% to £141.9m - reflecting the group's focus on working capital (the difference between what a company owes and is owed in the next 12 months).

Net debt stands at £650.1m, down from £826.3m last year, and is equivalent to 1.1 times the level of cash profits. The group has access to £323.9 in undrawn facilities and recently secured an additional $200m from a US private placing, which will be drawn down in December.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.