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Intertek - sales still struggling

Nicholas Hyett, Equity Analyst | 24 November 2020 | A A A
Intertek - sales still struggling

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Intertek Group plc Ordinary 1p

Sell: 6,064.00 | Buy: 6,066.00 | Change 28.00 (0.46%)
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Intertek reported a 7.3% decline in like-for-like revenues in the first ten months of the year - although conditions improved slightly in the July-October period. Full year revenues are expected to fall by a "mid-single digit" percentage.

Despite the disruption the group expects to reduce net debt (before any M&A or currency movements) this year.

The shares fell 3.2% in early trading.

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.

Exposure to natural resources, global trade flows and manufacturing have all been headwinds over the last year - as coronavirus wracked the global economy. However, we think Intertek's diverse offering and global customer base has shown remarkable resilience all things considered. Riding the global regulation wave remains a good place to be.

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 have fallen only 10%. Exploration and production revenues actually grew over the first half, as did the Minerals business.

The other point in the group's favour is a strong balance sheet with net debt under control and access to more funding if needed. We think it's very unlikely the group will need to come to investors looking for extra cash.

Over the longer term the group's strategy calls for a shift towards higher-growth, higher-margin businesses - such as ESG related monitoring and quality assurance. Unfortunately it seems progress here is on hold for now, and margins actually look to be going backwards. We hope that's a pandemic related blip rather than a trend, but something to keep an eye on at the full year nonetheless.

Intertek continues to prove its resilience, as a diverse and operationally sound business. However, we do have some concerns about how long it will take for growth to get back to previous levels and that could make for an unexceptional couple of years. The shares currently change hands for 31 times expected earnings, way above the longer run average of 21. That leaves little room for disappointment, and if the group fails to deliver the share price reaction could be painful.

Intertek key facts

  • Price/Earnings ratio: 31.9
  • 10 year average Price/Earnings ratio: 21.3
  • Prospective dividend yield (next 12 months): 1.7%

All ratios are sourced from Refinitiv. 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.

Register for updates on Intertek

Third Quarter Trading Update

Like-for-like (LFL) sales in the Products division were down 6.8% in the first ten months of the year. However, that's improved more recently, with sales down 4% in the last four months, as momentum recovered across most business lines. Full year sales are expected to fall by mid-single digits.

In Trade LFL revenues have fallen 10.2% year to date. More recently the group has seen improvements in its agricultural and oil & gas businesses, although disruption to manufacturing activity in China and lockdowns in the Middle East and Africa continue to impact global trade activity. Full year sales are expected to fall by a high single digit.

The Resources business saw sales fall 5.2% for the year to date, with sales down 9.6% in the last four months. The business continues to struggle with reduced capital expenditure in the oil & gas industry, with reduced demand for inspection activity on operating sites as well. Minerals delivered a better performance, with demand increasing. Full year sales are expected to fall by a mid-single digit percentage.

The group expects to finish the year with net debt of between £570m and £590m. That would be a reduction year-on-year and reflects strong cash flow generated during the year.

Find out more about Intertek shares including how to invest

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 Refinitiv. 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.