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Questor: Intertek ticks the box for quality but coronavirus has knocked it for six. Avoid
Questor share tip: the testing firm has made hay from globalised supply chains. Now margins may take four years to recover
Of all the vocabulary that has become commonplace through the coronavirus outbreak – furlough, self-isolation, super-spreader – there is one word about the aftermath of this extraordinary time that sends a shiver down the spine of committed capitalists.
Deglobalisation describes the reduction in cross-border trade and the shrinkage of supply chains that made China the workshop of the world, reduced costs and drove a decades-long economic boom.
With renewed focus on safety and security of supply, cost and efficiency are no longer top priorities as multinationals strive to get back to work. Political and business leaders know that that suggests locating manufacturing closer to home – at the very least for essential food and medical supplies.
This could be the bear case for investing today in a company such as Intertek, still one of lesser-known firms in the FTSE 100 but over the past decade or so one of the blue-chip club’s best performers. But the overall picture is more nuanced.
Intertek has thrived on the complexity that accompanies global trade. From 1,000 facilities in 100 countries it tests everything – from electrical equipment to clothing and food – to assure sellers they are shipping goods that meet the required safety standards and checking that buyers receive what they paid for. This quality assurance market is worth an estimated $250bn (£201bn) and growing.
Intertek’s activity levels depend on global trade. Thanks to the US-China trade war, 2019 was not a banner year, but the company still managed to grow its top line by 3.3pc. This year will be nothing like that, of course.
At full-year results on March 3, André Lacroix, the group’s chief executive, warned that coronavirus would affect performance, but that it was too early to say by how much. Intertek is not due to update the market again until May 21.
The World Trade Organisation predicted recently that global trade would contract by between 13pc and 32pc this year. In the last recession the testing industry outperformed GDP, but that is less likely this time, according to analysts at Deutsche Bank, who have pencilled in a 32pc drop in earnings this year for Intertek, followed by a 35pc rally in 2021.
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Looking further out, the bull case is not entirely redundant. The majority of these types of checks and certifications take place in-house, so much potential for outsourcing to experts such as Intertek remains. And there is added evidence of more tests demanded on more brands as regulatory standards rise no matter where products originate.
Company followers at Berenberg, the bank, point out that the 19pc of group revenues generated in China and Hong Kong – where the economy is already restarting – could be a mitigating factor for Intertek in an extremely tough year.
But the expected relocation of some manufacturing from China is likely to hit margins, they say, forecasting that the group will not see a return to 2019 levels until 2024 at the earliest.
Also worth pointing out is Intertek’s exposure to the resources industry. It was a standout performer last year because of strong exploration and production work. That may be harder to replicate in future as the oil price remains in the doldrums despite the Opec deal to cut global supply by 10pc from May.
Intertek has a solid balance sheet and has steadily diversified through acquisition. In August 2018 the $480m purchase of Texas-based Alchemy that saw it enter the market for “people assurance” – essentially checking that staff have the skills to do their job and training them if not – was a sensible attempt to move up the value chain.
Questor rated Intertek a hold last time we took a look in February 2017. In retrospect, we were too cautious because the shares have risen by 44pc since then, even taking into account recent falls. The question is where next.
Trading on 22.4 times consensus forecast earnings for 2021, the stock appears reasonably valued but there is much uncertainty.
The shares are down by less than a quarter from their record high reached in January. Intertek ticks the box for quality but external factors mean it could have further to fall. Avoid for now.
Questor says: avoid
Ticker: ITRK
Share price at close: £49.59
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