Sell Intertek's slow growth at a high price

Intertek's industry and assurance division, which accounted for almost a third of revenue last year and a fifth of underlying profit, provides services such as technical inspection, exploration and production support, and training for a range of industries. The largest proportion of the division is industry services, which caters to the energy infrastructure sector. During the last financial year clients delayed planned oil and gas projects, to the detriment of the business. Management also decided to exit some of its low-value technical staffing service contracts, costing the group £40m in revenue.

The division's margins were squeezed down 160 basis points on the previous year to 10 per cent, and adjusted operating profit fell by a fifth to £64.5m. In an attempt to mitigate its exposure to oil and gas, the group is seeking to diversify its client base. Nonetheless, management expects tightening capital expenditure budgets in the oil and gas sector to continue to drain revenue during this financial year.

Intertek's exposure to weak end-markets doesn't stop there. The slowdown in the global minerals market is bad news for the group's commodities division, which accounted for a quarter of last year's revenue and another fifth of profit. This provides services including cargo inspection and analytical assessment to global petroleum, mining, minerals and biofuels businesses. As exploration activity declined last year, so too did group's revenues, falling 7.4 per cent to £524m. This was compounded by the introduction of an ore export ban by the Indonesian government at the start of 2014.

During the second half of last year management stepped up a restructuring programme to deal with the decline. This has involved 1,100 job cuts, setting up shared service areas and trying to improve the efficiency of its laboratories. Nevertheless, neither the commodities nor industry & assurance division is expected to begin to recover until 2016-17.

Admittedly, other areas within the group do look healthy. The chemicals and pharmaceuticals business grew adjusted operating profit by 12 per cent last year to £18.6m, while profit at the consumer goods division rose marginally. However, these more buoyant performances were not enough to mitigatean overall decline at the commodities-exposed businesses within Intertek, with overall pre-tax profit down 11 per cent last year to £252m.

Intertek's EPS growth slowdown