Intertek shows its quality

Intertek (ITRK)’s performance still lags behind pre-pandemic levels. However, the quality and assurance giant believes Covid-19 will ultimately boost demand for its services, as companies struggle with their supply chains and demand for “better, safer and more sustainable” products grows. 

Intertek provides industrial testing and process assurance, covering a vast array of products and services including oil and gas, pharmaceuticals, beauty, furniture and pesticides. Its product division, which contributes two-thirds of group revenue, had a good year. Sales were up by 9 per cent at constant currency rates and adjusted operating profit rose by 18 per cent to £400mn. Its adjusted operating margin also crept up by 180 basis points to 22.8 per cent. 

Intertek’s trade arm, which provides services such as cargo inspection and analytical testing for petroleum and agricultural companies, is also performing well. While sales only rose by 2.8 per cent, adjusted operating profit leapt by 17.3 per cent to £51.6mn at constant rates. Resources proved less buoyant, with adjusted operating profit falling by 19 per cent and adjusted operating margin contracting by 120 basis points. 

This isn’t too concerning, however, as Intertek’s growth prospects are convincing, even if Covid-19 is still causing some disruption. The group focuses heavily on ESG issues in its latest results, and for good reason: Intertek is well positioned as corporations race to reduce their carbon footprints. Increased global trade, which requires multinational companies to meet different requirements in different countries, could also prove an important driver of growth.

Intertek’s indebtedness is worth keeping an eye on. In 2021, net debt excluding leases reached over £730mn, a sizeable increase of £313.4mn year on year. This was largely down to the acquisition of quality assurance company SAI in September.

Moreover, a fair chunk of debt matures within the next 12 months: £462mn of loans and borrowings plus lease liabilities of £63.5mn are listed as current assets.

However, Intertek’s cash position is robust. It reported free cash flow of £402m for 2021, and free cash conversion has been comfortably over 100 per cent for the past five years. 

With a forward price/earnings ratio of almost 25, Intertek isn’t cheap. However, sales are strong, margins are expanding and there seems plenty of scope for growth. Buy.

Last IC View: Buy, 5,150p, 2 Aug 2021