What In­tertek’s rev­enue rally means for its pre­mium rat­ing

This global qual­ity as­sur­ance com­pany passes a lot of tests but does it fall down on val­u­a­tion?

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FTSE 100 multi­na­tional in­spec­tion, test­ing and cer­ti­fi­ca­tion com­pany In­tertek (ITRK) started life on the mar­kets as a ma­rine surveying busi­ness in the 1890s but is now so much more.

The com­pany is among other things the largest tester of con­sumer prod­ucts in the world, with over a 1.000 lab­o­ra­to­ries in a 100 coun­tries.

Be­cause these ser­vices are of­ten driven by reg­u­la­tion, rev­enue and in turn profit and cash flow is rel­a­tively pre­dictable. This has helped un­der­pin a con­sis­tent track record of div­i­dend growth.

The com­pany re­cently re­leased an up­date for the four months to 30 April to tell in­vestors how things have been go­ing so far this year.

CEO An­dre Lacroix seems up­beat on his firm’s 4% or­ganic growth rate dur­ing the time frame. An­a­lysts, some of whom have been quite scep­ti­cal of the com­pany’s re­cent re­sults, seem to share his en­thu­si­asm.

Shore Cap­i­tal an­a­lyst Ben McSkelly says the state­ment seems to con­firm full year guid­ance ‘hint­ing at the top range’.

McSkelly had pre­vi­ously ques­tioned whether some of the charges the com­pany had writ­ten off as ‘ex­cep­tional’ were in fact one offs or ac­tu­ally on­go­ing busi­ness im­prove­ment costs.

The com­pany is tar­get­ing moder­ate mar­gin ex­pan­sion and strong cash con­ver­sa­tion so bring­ing in rev­enue of £861.2m in the first four months is a de­cent start.

How­ever, half year re­sults on 7 Au­gust may get a more scep­ti­cal hear­ing if the com­pany has again in­cluded a load of ex­cep­tional charges.

AD­DRESS­ABLE MAR­KET

The global qual­ity as­sur­ance mar­ket is worth $250bn and In­tertek is a big player in it, with the com­pany’s main ri­vals sit­u­ated overseas. How­ever, this strong mar­ket po­si­tion­ing is al­ready re­flected in a pre­mium val­u­a­tion. Based on fore­casts from JP Mor­gan Cazen­ove the stock is on a 2019 price-to-earn­ings ra­tio of 26.3-times.

Reuters peer group av­er­age trades on 16.4-times so maybe this is why the com­pany has so many an­a­lysts sit­ting on the fence. Only two buy rec­om­men­da­tions ver­sus 10 holds says some­thing about how the mar­ket views the stock.

A pre­mium is not jus­ti­fied sim­ply be­cause it might be the only com­pany work­ing in this ex­act sec­tor in the UK. Fund man­agers have ac­cess to stocks in mar­kets all around the world.

In­tertek does have a record of up­ping its div­i­dend pay­ment ev­ery year, it has done so for the last decade. The com­pany is tar­get­ing a 50% pay­out ra­tio for 2018 and JP Mor­gan has taken them at their word and fac­tored this in to es­ti­mates al­though it notes ‘our fore­cast is well above con­sen­sus’. (DS)

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