Our tip from a year ago has produced a total return of some 26pc – but don’t cash in yet

World economy’s prospects remain highly uncertain and geopolitical threats are elevated, but Intertek continues to offer significant long-term investment potential

‘It would not be a surprise for it to further leverage its sound balance sheet to bolster its competitive position’

Since Questor first advised readers to buy Intertek just over a year ago, the FTSE 100 member’s share price has surged 23pc higher. In doing so, the provider of testing, assurance and inspection services to a wide range of industries has outperformed the index by 20 percentage points. When dividends received since our original tip are added to its performance, the company has produced a total return of around 26pc.

Clearly, many investors are likely to be tempted to bank their profits and sell the stock after generating a substantial return in a relatively short space of time. After all, the world economy’s prospects remain highly uncertain as interest rate cuts are delayed in the US, China’s property sector continues to struggle, and Europe and the UK produce extremely disappointing rates of GDP growth.

Moreover, geopolitical threats are elevated, with the ongoing war in Ukraine, conflict in the Middle East and tensions in Asia having the potential to prompt significant share price declines over the short run.

However, Intertek continues to offer significant long-term investment potential. The firm’s latest annual results, released last month, showed it is making encouraging progress in delivering on its growth strategy. Sales rose by 6.2pc on a like-for-like (LFL) basis, which is their fastest rate of growth for a decade, while operating profit margins increased by 60 basis points to 16.6pc as cost savings were delivered. Rising sales plus profit margin growth equated to an increase in operating profits of almost 11pc year on year, with the company expecting further growth in the current financial year. In fact, it expects to generate mid-single digit LFL sales growth this year, with further margin expansion set to provide an additional boost to profit growth.

Rising profits mean higher dividends are ahead for the company’s investors. It raised shareholder payouts by 5.6pc during the year and plans to further increase them as it targets a 65pc payout ratio from 2024 onwards. Given that dividends amounted to around half of earnings in 2023, this represents a significant growth rate when combined with a forecast rise in profits of 15pc over the next two financial years. It means that the company’s shares could be yielding as much as 3.4pc in 2025, assuming no change to their current price. This may result in the stock becoming an increasingly viable income investing option when an annualised dividend growth rate of 9.3pc over the past decade is taken into account.

Encouragingly, the firm’s balance sheet remains sound. It has a net gearing ratio of 68pc, with net interest cover amounting to a very respectable 13 in its latest financial year. Its solid financial position has enabled it to make several acquisitions of late that expand its operations into highly profitable and fast-growing sectors, with the most recent purchase taking place last month.

It would be unsurprising for the company to further leverage its sound balance sheet to bolster its competitive position should asset prices come under pressure from geopolitical risks or an uncertain economic outlook in the short run.

Over the long run, inflation is highly likely to return to central bank targets in the US, Europe and the UK. This is set to prompt a fall in interest rates that acts as a positive catalyst on the global economy. This should prompt growing demand for Intertek’s services, with its substantial dependence on economic activity levels likely to ultimately have a beneficial impact on its financial performance and share price over the coming years. Following its share price rise over the past year, the stock now trades on a price-to-earnings ratio of 22.4. This is up on the 19.2 figure from the time of our original tip and suggests there is now more limited scope for an upward re-rating. However, with the company’s financial performance forecast to improve, it continues to offer fair value for money on a long-term view.

Indeed, Intertek remains a worthwhile purchase. Its sound financial position reduces the risk of permanent capital loss, while providing scope for acquisitions during an uncertain period for the world economy. And with profit margins set to further rise alongside sales growth as the global economy’s prospects gradually strengthen, the company’s improving financial outlook means additional capital gains and index outperformance are ahead.

Questor says: buy Ticker: ITRK

Share price at close: £49.90