Intertek Group PLC (LON: ITRK) – Operational excellence driving sustainable value creation for all

Intertek Group PLC is an FTSE 100 Index listed industrial support services company founded in 1885 and headquartered in London, the United Kingdom. ITRK provides quality assurance services. The Company has three divisions: Resources, Trade and Products. The Resources division has two business lines: mineral business and industry services business. The Trade division consists of three business lines: Government & Trade Services business, Caleb Brett and Agriculture business. The Products division focuses on ensuring the safety and quality of products and physical components. It also assesses the quality management systems and the operating process of its customers and minimises risk.

On 24 November 2021, ITRK would release its next trading update.

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by ITRK from FY2017 to FY2020. In FY2021, ITRK would pay an interim dividend of GBX 34.20 per share. It would be paid on 7 October 2021 and has an ex-dividend date of 16 September 2021.

The current dividend yield of ITRK at ~2.10% is higher than the dividend yield of Industrial support services at ~1.30%. It is also higher than the United Kingdom 10-year bond yield of ~0.5390%.

Growth Prospects

• Recent acquisitions: On 13 May 2021, ITRK announced the upcoming acquisition of SAI Global Assurance, which would provide additional scale to ITRK’s assurance offering and strengthen it further. On 21 July 2021, ITRK acquired JLA Brazil, the market leader in Food, Agriculture and Environmental testing solutions. It would offer ITRK the opportunity to enter the fast-growing food testing sector in Brazil.
• Growth prospects of the global quality assurance market: The Companies in the global quality assurance market will invest further to reduce risk in their supply chain. Hence, the global quality assurance market is expected to grow faster in the post-Covid period. It offers ITRK significant growth prospects by customer retention, customer penetration, assurance selling, new customer wins and customer outsourcing.
• Investments in innovation: The Company is investing in breakthrough innovations to create new markets. It is also investing in innovations to expand into high-margin and fast-growing areas.
• Operational excellence driving sustainable value creation: ITRK has significant operational excellence. It strives for continuous improvement based on frequent customer feedback. The Company had a carbon neutral target of 2020 and has a net-zero emissions target of 2050.

Key Risks 

• Failure to achieve desired synergies: Any failure to achieve expected synergies from the acquisitions could impact both revenue and cost for ITRK.
• Muted macroeconomic sentiment: Any further outbreak of Covid-19 could have a prolonged impact on global economic conditions. It could lead to muted consumer confidence and could further affect the business sentiment across the globe.
• Disturbance in the supply chain: Any further disruptions due to the delta variant of Covid-19 could affect the supply chain of ITRK, impacting its operational performance and increasing its costs.
• Cyber threats: Cyber-attacks could threaten the Company’s valuable client data by bypassing its data protection mechanism. Hence, the Company has to incur costs to protect its sensitive data.
  

Now we will analyse some key fundamental and shareholders statistics of Intertek Group PLC.

Financial and Operational Highlights (for the six months ended 30 June 2021 as of 30 July 2021)

(Source: LSE Website)

• Driven by like-for-like Products revenue YoY growth of 9.7%, overall like-for-like revenue in H1 FY2021 surged 5.8% YoY.
• It led to overall revenue rising 4.8% YoY at constant rates.
• Growth in revenue and cost savings resulted in operating profit at constant rates surging 26.2% YoY and profit before tax at constant rates rising 30.3% YoY in H1 FY2021.
• ITRK had a solid cash conversion of 135% in H1 FY2021, which led to a free cash flow of £122.6 million.
• The solid free cash flow led to financial net debt falling 33.1% YoY in H1 FY2021.
• The Company is making investments to seize attractive organic and inorganic growth prospects.
  

Financial Ratios (H1 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 23 August 2021, at 9:25 AM GMT, ITRK’s shares were trading at GBX 5,248.00, down by 0.04% against the previous day closing price. Stock 52-week High and Low were GBX 6,492.00 and GBX 5,024.00, respectively.

On a daily chart, the momentum indicator RSI (14-period) is trading at ~42.44 level and moving towards the oversold zone, indicating the possibility of an upward movement. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last five years, ITRK’s stock has delivered a decent positive return of ~45.47%. Also, it has outperformed the FTSE 100 index with a return of about 3.80%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

ITRK delivered a decent performance in H1 FY2021, with operating profit at constant rates surging 26.2% YoY. Driven by a solid free cash flow, net debt fell 33.1% YoY. This reduced leverage could help funding further acquisitions and making further investments in innovation to drive growth. As per the management, ITRK would deliver robust like-for-like revenue growth in FY2021. The Company could benefit from synergies from its completed acquisitions, growth prospects of the global quality assurance market, its investments in breakthrough innovations and its operational excellence going into H2 FY2021. The management has great confidence for FY2021 and anticipating further progress of the Company’s service lines. The Board is very excited about the quality assurance growth opportunities, with its industry-leading capability and expertise.

Considering the synergies from the acquisitions, the Company’s investments in innovations, its decent growth prospect, the better profitability and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Intertek Group Plc at the current price of GBX 5,248.00 (as on 23 August 2021 at 9:25 AM GMT), with lower-double digit upside potential based on 32.73x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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