■ Minerals-related sales under pressure
■ First-quarter margins are down
■ Shares still demandingly rated
Testing and quality control business Intertek's (ITRK) trading update this month, covering the four months to 30 April, revealed a mixed picture. True, revenue rose 9.9 per cent in the period - with organic sales growth having reached 7 per cent, with the remainder being driven by favourable currency movements and acquisitions. But revenue from the commodities operation "declined more sharply than expected".
That slippage reflected a reduction in mining activities - which involves testing the mineral content of rocks - leading to lower sample volumes and price competition. Admittedly, mineral testing generates just 6 per cent of Numis Securities' £2.28bn revenue forecast for 2013, but some analysts think the capital-intensive nature of this business - combined with increased price competition - means the impact on profits will be amplified. Indeed, management reported that the group's margin was below last year's level as result of the sharp profit decline in the minerals business. Moreover, that decline is expected to continue into the second half as the sector overall experiences a more prolonged downturn.
Still, the industry and assurance business enjoyed strong demand from the energy sector, and the consumer goods division was boosted by strong textile and goods testing. However, the commercial and electronics side was weaker - reflecting slower demand in some European countries - and the chemicals and pharmaceuticals operations had a "mixed start" to the year.
Numis Securities says...
Buy. The shares have performed in-line with the market over the past three months and trade on 20 times 2014's forecast earning (of 163.1p). We regard the earnings downgrade as a cyclical blip and look to buy into weakness. We remain positive on the structural growth, high return model, combined with a rapidly de-gearing balance sheet - which provided significant scope for acquisitions. Intertek has been relatively light on its bolt-on spend compared to peers and expect an acceleration in the remainder of the year - with scope for a larger deal. We remain positive on the long-term structural growth and high returns model, combined with a strong balance sheet. Expect pre-tax profit of £343m for 2013, giving EPS of 145.7p.
Deutsche Bank says...
Hold. If organic growth has bottomed there shouldn't be a significant derating - despite elevated share price multiples. Moreover, the group boasts a lower exposure to minerals than its peers and an excellent long run growth story. But the shares do trade on 22 times consensus earnings estimates for 2013, and 20 times for 2014 - so we expect some share price weakness following the trading update. Overall, therefore, we retain our hold recommendation on the shares and - despite the long run attractions - see little near-term value at current levels. Expect adjusted pre-tax profit of £338m for 2013, giving adjusted EPS of 131.16p.
