Credit Suisse sees more M&A ahead at Intertek, lifts target

Constrained organic growth from the ongoing malaise in the Resources sector meant the current 'risk and reward' relationship in Intertek shares was "unattractive", Credit Suisse said, although looking further out more acquisitions would help remedy that.

In the medium-term, the testing and inspection equipment-maker's organic growth was seen returning to mid-single digit levels, but in 2017 it would remain at 1.3%, the Swiss broker said, due to the above headwinds.

However, its strong cash generation and low levels of debt led the broker to pencil in further acquisitions.

Net debt at the group stands at just 1.1 times its operating profits, whereas the company is targeting between 1.5 and 2.0 times EBITDA.

That and some tweaks to its estimates for Intertek's earnings per share between 2017 and 2019 - from FX movements and a recent acquisition - have led the broker to raise its target price on the stock from 3,200p to 3,500p.

More specifically, Credit Suisse upped its EPS estimates for those three years by 1.0%.

Nonetheless, those near term growth prospects and the 20.3 2018 price-to-earnings multiple the shares are sporting lead the analysts to keep their recommendation at 'Underperform'.

Ahead of the firm's 26 May trading statement, Credit Suisse also cautions that Intertek is the most exposed of the major TIC names to a negative impact on global trade from current "high" geo-political tensions.

Other downside risks to monitor are further pressure in the oil and gas markets and rising costs for M&A as competition for assets increases.

Upside risks to watch for Credit Suisse said, included more M&A activity, a more rapid improvement in oil and gas markets, increased operational leverage resulting from strength in the Product division and/or further progress with internal efficiency projects.