Intertek’s quality checks will remain in demand

THESE days everything comes wrapped in red tape and regulations. That is ideal for Intertek, who works with some of the biggest brands like Unilever, Kraft and ConocoPhillips.

The company makes most of its money from quality control checks on everything from toys to heavy machinery. In the long term we suspect the pandemic will result in a whole new set of controls, but the initial impact on Intertek’s business hasn’t been good.

2020 revenues fell 6.7 per cent, and operating profits dropped 17 per cent. Sales should pick up, but there’s still a chance that a post-pandemic downturn is on the horizon. With restrictions dragging on into the summer, sales may take a while to recover. However, one part of the global economy that’s showing better progress is natural resources.

A rise in commodity prices has boosted profits in the industry, and that’s good news for Intertek’s resources division. This business provides checks to new and existing mines and oil and gas projects. It’s suffered recently, but we think there are reasons to be positive going forwards, especially if inflation picks up.

Last year Intertek focused on paying down debt, even at the expense of current investment. That strategy put the balance sheet in a strong position, with net debt falling 33.3 per cent to £419.9million. That provides some flexibility if conditions are challenging. Still, spending is necessary if Intertek wants to keep growing.

It was no picnic in 2020 but the group rode out the storm. Our greatest concern is whether the environment is positive enough for Intertek to thrive. Its valuation doesn’t seem to price that scenario in though – with a price-togrowth earnings ratio some way above the 10-year average. That kind of premium makes sense considering the diversification across several geographies and markets. Quality assurance isn’t going anywhere and is more likely to grow post-pandemic.

Even if the economy wavers, demand for Intertek’s certifications will remain.

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