There are few businesses that actively welcome the introduction of new or more stringent regulations. Intertek is one: every time the rules are tightened, it gives this company more to test to provide the assurance its customers need that they are in compliance. In that, given the trends among regulators, it is probably operating in a structurally growing market.
Intertek is one of the UK’s great, but relatively unsung, corporate achievers. The group was founded in 1885 as a marine surveying business to independently test and certify ships’ cargos and has grown through a combination of organic expansion and bolt-on acquisitions.
Having been spun out of what was then the Inchcape industrial conglomerate by its management in 1996, it listed its shares in 2002 and joined the FTSE 100 in 2009. It employs more than 44,000 people in more than 100 countries and in its most recent financial year made pre-tax profits of £456.5 million on revenues of just over £2.8 billion.
One of Intertek’s engaging characteristics is its ability, despite its size and presence, to seek out new markets, offering high growth and high margins. This week, for example, it entered the hospitality industry, buying Check Safety First, which among other things provides health and hygiene tests for hoteliers.
While small — Check Safety First will make revenues of £10 million this year and the price paid by Intertek wasn’t big enough for it to have to be disclosed — this is a potentially huge market for the company to explore. Being part of a group of Intertek’s size should give it the resources to develop further in testing and assurance for the travel and tourism sector.
The group has also tried this year to capitalise on the growing market for cybersecurity and over the past two years has made a string of small acquisitions, the most notable being of Alchemy, which tests skills in the food industry and cost $480 million.
Check Safety First will be folded into Intertek’s products division, the biggest of its three sectors that generated 60 per cent of group revenues in the first six months of the year. This division is the core part of Intertek’s testing and assurance activities, working for customers from pharmaceutical companies to retailers and manufacturers.
The group’s two other divisions are trade, which certifies cargos as they move across borders, and resources, whose customers include mining companies and industrial groups.
As far as Intertek is concerned, it is only scratching the surface of a market for winning contracts to test companies’ products and processes that is worth $250 billion, only $50 billion of which is farmed out to third-party providers.
While it may be that each increase in the regulatory burden prompts more companies to outsource the work, it feels likely that larger multinationals might keep their practices in-house unless it is much cheaper to go outside.
Intertek has stayed in the FTSE 100 in part because it has turned in such stable and reliable growth — revenues rose 4.7 per cent to nearly £2.5 billion over the first ten months of the year, stripping out exchange rate movements, for example.
Its ability to improve margins consistently has benefited earnings and shareholders welcome an ever-improving dividend that amounts to about 50 per cent of profits.
The shares, down 20p or 0.3 per cent to £57.80 yesterday, have risen by about 13.5 per cent since this column recommended buying them in February. They are valued at nearly 24.7 times Jefferies’ forecast earnings for a dividend yield of 2 per cent and should have some more to give.
Advice Buy
Why High-quality group with strong growth potential, reliable earnings and consistent dividend
Softcat
The business model and investment proposition of Softcat seem so straightforward that it’s tempting to cast around for the catch.
Companies need to upgrade their computers and software, so Softcat sells them PCs and new programmes. As the world of IT becomes more complex, the group sells its clients additional products, such as services for the cloud and cybersecurity.
In a market that seems to be irrepressibly growing, Softcat’s investors have grown used to annual increases in revenues and profits of well above 20 per cent — with special dividends alongside their regular payouts from a company that generates a lot of cash.
With its share of the pie running at only 7 per cent, against about 10 per cent for its closest listed competitor Computacenter, the obvious conclusion is that there is plenty more room in the hard drive and this outfit will keep going from strength to strength. What can go wrong?
Softcat is a contraction of Software Catalogue, founded in 1993 by the entrepreneur Peter Kelly, who at 62 still owns almost a third of the shares. As well as selling computer kit and systems to small and mid-sized businesses, the group supplies the public sector and offers consultancy services.
It has strong relationships with all of the big manufacturers, from Dell to Apple, and it keeps its costs down by not using warehouses to store its orders, giving it a highly respectable operating margin most recently disclosed at 21.3 per cent.
And the catch? Softcat is effectively an entirely UK-facing company and as such is exposed to changes in business sentiment here; but then having a safe and up-to-speed computer network is no longer a luxury for most companies.
About 30 per cent of its revenues are recurring, through software subscriptions or licences, so the company has to win a lot of new business each year to keep up the momentum. The main worry is the strength of its stock market rating, which would suffer badly from an unwelcome sales surprise.
Its shares, down 12p or 1.1 per cent yesterday to £11.15, are at 29.9 times Jefferies’ forecast earnings to give a dividend yield of about 3.2 per cent.
Advice Take profits
Why The shares have had a storming run and would release good value
