Intertek justifies rating and hikes divi

A decent rise in the dividend and positive outlook was enough to offset a dip in profits at Intertek last year. The product inspection services group topped the FTSE 100 risers and, while the shares may not be cheap, the City is convinced the firm is one for the future.

Intertek's figures were hit by foreign exchange headwinds and challenges facing both the oil & gas and mining sectors, with all but one of the headline figures down on the year. Revenue fell 4% to £2.1 billion, operating profit dropped 11% to £277 million, as did pre-tax profit at £252 million. Strip out one-offs like acquisition and restructuring costs, and pre-tax profit fell 4.7% to £300 million. At constant currency profit it actually rose 2.5%.

Statutory diluted earnings per share fell 12% to 108.8p, but cash generated from operations rose 2.4% at £404 million. Adjusted EPS at constant FX increased by 2.6% to 132.1p.

"We saw continuing headwinds in the oil and gas capex and mining sectors, and the effect of our strategic exit from certain low-value Industry contracts," explains chief executive Wolfhart Hauser.

On an actual basis, growth was delivered in its commercial & electrical and chemical & pharmaceuticals divisions, and although commodities saw growth in the oil and gas cargo trade business, declines in minerals driven by the Indonesian ore export ban offset them. Its revenue from its industry & assurance business also suffered after Intertek cancelled its low-value contracts.

However, looking beyond this year, challenges from its oil and gas capex business - currently about 13% of group revenue - are expected to ease and the group thinks it is able to take advantage of a long-term growth in energy demand. It's why the dividend is hiked by 7% to 49.1p.

"Intertek is well placed to deliver mid-single digit organic revenue growth over the medium term, supplemented by growth from acquisitions," said Hauser.

And Deutsche Bank believes there is enough stability at Intertek to buy into a medium-term structural growth rate.

"When we upgraded to Buy in December it was a contrarian call, but if the company can be stable through a halving of the oil price and previously through a global financial crisis then we expect that investors will continue to re-rate the shares," says the broker.

"Intertek trades on 19x 15e P/E, 15x EV/EBITA and 4.5% FCF yield [at 27 Feb]. The recent precedent across business services and the market is that stocks that show revenue stability and consistent cash flow go to 20x earnings or above and Intertek looks set to follow that path. Buy."

Leading the FTSE 100, its share price rose by 4% to 2,622p in response to the news, back above the 200-day moving day average. Intertek shares now trade on nearly 19 times forward earnings, a premium to the sector, although JP Morgan feels that sentiment/trading in the Minerals/Oil & Gas sectors may be turning.

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