If a company makes a product that needs testing and it cannot or doesn’t want to do it itself, there’s a reasonable chance that it will turn to Intertek. This FTSE 100 company is one of three world leaders in the provision of testing, inspection, certification and assurance services, carrying out checks on pretty much every type of material that needs to go through quality control, from toys and clothes to fruit and vegetables, from masonry and metals to industrial petrochemicals. In short, it is one of those British success stories that quietly gets on with it, and rather well. That is no automatic reason to go out and buy the shares, of course.
Intertek’s history dates back to 1885, when Caleb Brett established a marine surveying business in Britain to independently test and certify ships’ cargoes. For a time part of the Inchape trading empire, it was spun out via a management buyout in 1996 before listing in 2002.
It has been a constituent of the FTSE 100 since 2009 and in its most recent financial year made revenues of just under £2.8 billion and pre-tax profits of almost £440 million. It has a strategy of expanding through a combination of organic growth and acquisitions, tending to acquire several, often small, businesses each year, most recently swallowing Alchemy, a specialist in skills testing for the food industry, for $480 million.
The biggest part of Intertek’s business, accounting for 61 per cent of revenues and 75 per cent of profits, is its products division. This tests and certifies a wide range of goods, often with consumers as their destination, working for retailers and manufacturers and the like in areas such as home appliances and lighting.
Its two much smaller units are trade, which certifies cargoes being shipped across borders, regularly having to clear several assurance processes along the way, and resources, effectively mining and minerals and all things industrial, such as parts-checking for the oil and gas sector. These two account for close to a fifth of revenues each, but a respective 17 per cent and 6 per cent of profits.
Intertek’s growth has been stable and reliable. It consistently turns in mid-single-digit increases in revenues, but a seemingly relentless emphasis on improving margins has meant that pre-tax profits have grown at a significantly faster rate. This is expected to be the 15th consecutive year of higher dividends from a company that pays out 50 per cent of its earnings to shareholders.
Its growth strategy over the long term is simple. Intertek reckons that the market for quality assurance is worth about $250 billion, of which only $50 billion is contracted out to a third party. With increased regulation and a higher emphasis on risk management acting in its favour, the idea is that more companies will outsource their testing processes. It should be well placed to compete for new business, therefore, particularly in the higher-charging parts of the market, going up against rivals such as SGS, based in Switzerland, and Bureau Veritas, of France.
There are obvious potential pitfalls. In a slowing global economy, companies might be less minded to pass on in-house work, particularly if it costs them more to do it. Intertek is also cyclically exposed to multiple industries; it felt the effect, for example, of the downturn in the oil and gas industry. In so many other ways, though, the winds feel as if they are blowing in the company’s favour.
Intertek’s shares, down 40p, 0.8 per cent, at £50.70, trade at 21.9 times JP Morgan Cazenove’s forecast earnings for a yield of 2.1 per cent. That is by no means unreasonable and they look like an attractive bet over the long term.
ADVICE Buy
WHY High-quality business with stable, long-term structural growth potential linked with higher regulation
Softcat
Softcat is one of those companies whose shares are often among the main movers — in either direction — on any given trading day on the stock exchange. This is, in part, because the nature of its business means that it regularly updates the market about its trading, which tends to be price-moving. As an entirely UK-focused reseller of computer hardware and software, it has also been under the spotlight as a potential loser from Brexit.
Founded as Software Catalogue in 1993 by the entrepreneur Peter Kelly, Softcat resells IT systems, hardware and software to small and medium-sized businesses and to a far lesser extent the public sector. It has trading relationships with all of the big computer groups, from Apple to HP to Dell to Microsoft, and it provides consultancy services to companies on systems and software installations and upgrades.
Based in Buckinghamshire and employing 1,200 people, Softcase was listed on the stock market in 2015 at 240p, since when its shares — up 5p, 0.7 per cent, to 710¼p yesterday — have risen by just under 200 per cent.
The slightly scary thing about its model is that each year Softcat effectively has to start from scratch: it has some recurring revenues from license agreements, but otherwise every customer is a new one (hence the regular updates). The impressive thing is that it has improved its revenues during every six months since its listing by more than 20 per cent, except for its first reporting period in March 2016. This is testament to the strength of its sales force and to wider factors such as the heightened emphasis on cybersecurity and companies migrating their systems to the cloud.
Two confident updates in short succession, the second of which in early January talked of being materially ahead of where it expected to be, have dimmed any Brexit edginess. Yet there are concerns. Leaving the EU could bring supply chain problems and higher costs, with an accompanying fall in domestic business confidence that drags back sales. The shares, which trade at 21 times Berenberg’s forecast earnings for a yield assuming special dividends of about 5 per cent, are otherwise attractive.
ADVICE Hold
WHY High-growth, sales-driven business, but facing Brexit uncertainty
