Paris-listed Eurofins Scientific (ERF:EPA) is the world leader in food, biopharmaceutical and cosmetics product testing and environmental laboratory services. It employs over 48,000 people in more than 800 laboratories across 50 countries.

Roughly half of annual turnover comes from food and biopharmaceutical product testing and services, businesses which are set to grow due to ageing populations and increasing regulation.

Eurofins’ laboratory network was well placed to assist the global effort in tackling the Covid pandemic and drawing on its experience of SARS it rapidly developed testing services, solutions and products to support over 20 million patients per month.   

While this generated revenues for the group, some of its core businesses experienced a drop over the summer due to the global slowdown, although by June the firm was already beginning to see a sharp recovery in demand.

Commenting on the half-year results, which saw sales rise by 7.4% to €1.18 billion and pre-tax profit rise by 28.4% to €264 million, chief executive Gilles Martin said that had the pandemic not occurred the firm’s performance would have been better. Even where sales hadn’t quite got back to pre-Covid levels, cost cuts meant profitability was higher as demonstrated by the faster growth of earnings.

The positive news on the Pfizer/BioNTech vaccine sent Eurofins’ shares down 8% on the day, and they continue to languish at the levels they saw in the summer even though analysts and the company weren’t factoring in much revenues from testing beyond next year.

The firm has typically generated a 10% or greater return on capital employed, partly thanks to small bolt-on deals in niche, high value-added areas.

With its two latest acquisitions it became the leading genetic analysis firm in Japan and the market leader in environmental testing in Taiwan, increasing its global footprint in genomic services, diagnostics and agroscience.

The company forecasts sales growing at a 5% organic rate per year from this year to 2022 and beyond, supplemented by acquisitions, while analysts at Berenberg believe it has significant under-used lab capacity and see strong operational gearing and margin improvement being the next drivers of the growth story.

Rapid growth in free cash flow is expected to reduce gearing to less than two times EBITDA, while the firm’s investment-grade rating and clear ESG credentials mean it should enjoy above-average governance ratings.

Despite its appeal, Eurofins trades at a significant discount to its peers including Intertek (ITRK) and Switzerland’s SGS.

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