Apparently, prior to its ultimately unconsummated tie-up talks with SGS (SGSN:SWX), France’s Bureau Veritas’(BVI:EPA) first choice was to look at UK-listed peer Intertek (ITRK). In our view investors should take heed of this signal from an industry player and snap up shares in the FTSE 100 constituent.
Like its Swiss and French counterparts, Intertek is a leading player in the assurance and testing, inspection and certification (TIC) industry. Upcoming full-year results on 4 March are an opportunity for the group to remind the market of its many strengths and help drive the shares higher.
DIVERSIFIED APPROACH
Intertek operates in a wide range of industries including food, chemicals, transport and retail, and benefits from significant regulatory drivers which help provide good visibility on future earnings. Its activities can range from inspecting power stations and certifying vaccines to testing toys.
A fair amount of testing is still done in-house but firms are increasingly choosing or being pushed by regulation to outsource this activity which provides Intertek with an avenue for meaningful growth.
In its 2023 annual report, Bureau Veritas estimated the size of the annual TIC market was “close to €300 billion”, of which 45% is outsourced while the other 55% is government-contracted or carried out internally.
The shares may not look all that cheap at face value, on around 20 times 2025 earnings, but businesses like Intertek are worth paying up for and that rating represents a material discount to the historic average. The company was last at these valuation levels during the financial crisis.
PROVIDING ASSURANCE
An increasing push into assurance, which goes beyond testing to identify and mitigate risks in a company’s operations or supply chain, could be a significant development for the business as it becomes more embedded into its clients’ day-to-day activities.
Fund manager Nick Train, who recently added Intertek to his list of holdings in Finsbury Growth & Income Trust (FGT), says: ‘Intertek’s 20% of revenues from assurance puts it ahead of other testing companies, and we believe its expertise here will only become more valuable over time as this IP (intellectual property) becomes standard across industries and ultimately drives wider uptake.’
The company has five divisions: Consumer Products (which focuses on helping clients develop and sell better, safer and more sustainable products); Corporate Assurance; Health and Safety; Industry and Infrastructure; and World of Energy.
The latter unit has a lot of experience serving traditional energy sectors like oil and gas and petrochemicals but also has expertise in renewables so is well positioned regardless of the pace of the energy transition.
INTERTEK IS INCREASINGLY PROFITABLE
Intertek has become increasingly profitable over recent years, following material investment in its capacity, and investment bank Berenberg thinks the firm will beat its 17.5% medium-term EBITDA (earnings before interest, tax, depreciation and amortisation) margin target in 2025.
Analyst Carl Raynsford adds: ‘We think this margin accretion will translate to strong EPS (earnings per share) growth over the medium term, and likely the most predictable growth in the peer group.’
Some of the pressure on Intertek’s shares has been linked to the company’s Chinese business – which accounts for 18% of its revenue – and the fear a more aggressive US trade policy towards China will prove damaging.
We have to acknowledge this is a risk, but one which we believe is probably largely priced in by the market at this stage.
In turn, Berenberg estimates the US comprises just 12% of Intertek’s consumer testing export business revenue which is just 2.5% of overall group revenue.
The company has a robust balance sheet – company guidance and consensus forecasts suggest year-end borrowings will come in below the firm’s targeted leverage range of 1.3 to 1.8 times earnings.
It also generates plenty of cash, given which it has scope to look at acquisitions, but we are reassured the company is largely focused on investing in the business for organic growth, and any deals are likely to be easily digestible.
It can also continue to reward shareholders with a steady stream of dividends. After a period when it was held steady during the pandemic, the payout has started to rise again and the stock offers a meaningful dividend yield of 3.1% based on 2025 forecasts.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
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