A double upgrade from investment bank Jefferies is helping health and safety specialist Intertek (ITRK) to market-beating gains today.

Shares in Intertek trade 4.7% higher at £37.08 after Jefferies analyst Will Kirkness moved from ‘buy’ to underperform on the stock.

‘Our recommendation is not predicated on a next quarter beat or step change in financials,’ writes Kirkness.

‘Instead, we expect steady improvement in organic growth, margins and free cash flow.’


ITRK - Comparison Line Chart (Rebased to first)

Among the key insights from the research, Kirkness says Intertek has the potential to generate strong growth in its Products division, increase margins 35 basis points a year and deliver further growth through a bolt-on merger and acquisition (M&A) strategy.

‘A deep dive into the Products division (70% of operating profit) suggests that organic revenue growth and margins are well supported by structural drivers around supply chains, regulations and proliferation of stock keeping units (SKUs),’ writes Kirkness.

‘The outlook is particularly appealing for building and construction, electrical and wireless and business assurance.’

Margin improvements of 35 basis points annually, on top of margins already around 16%, can be delivered through the use of three key levers, Kirkness says. Lower quality assets can be divested, boosting margins by around 10 basis points a year; performance management and process streamlining could add 15 basis points; and back office work and supply chain management should be able to deliver a further 10 basis points.

Finally, Kirkness argues a more disciplined approach to M&A could enhance shareholder value.

'In our view, a bolt-on approach to M&A has a better chance of adding value and we do expect a more rigorous approach to M&A,’ writes Kirkness.

‘We now include M&A in our formal forecasts but depending on capital allocation policies, could see 1%-2% incremental earnings per share (EPS) per annum from either share buybacks or M&A if leverage moves to the upper end of the targeted 1.5-2.0x net debt to earnings before interest, tax, depreciation and amortisation (net debt/EBITDA) range.’

Downside risks to Intertek’s share price include a slowdown in consumer spending, Kirkness adds.


Sales and earnings forecasts - underlying (£m)
2015A 2016E 2017E
Sales 2,166 2,529 2,780
Operating profit 343 401 458
Finance costs 24 30 28
Pre-tax profit 319 371 430
EPS 141p 162p 188p
Source: Jefferies, 4 Oct 2016




Issue Date: 04 Oct 2016