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This global quality assurance company passes a lot of tests but does it fall down on valuation?
Thursday 31 May 2018 Author: David Stevenson

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.


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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