Berenberg reiterates 'hold' on Intertek, raises target price

The broker said despite low organic revenue growth of 0.5% in the first half, the testing and quality control company delivered a solid margin performance, which suggests that renewed focus on short-term delivery is having a positive impact.

“While we remain hopeful of a return to modest levels of organic growth in fiscal year 2017 (we forecast 3.6%), we see downside risk to estimates from the group’s oil and gas exposure, from both its capex-linked activities (c11% of group sales) and its production and trade-linked activities (c16%).”

Berenberg said organic growth remains low due to the group’s oil price-dependent and capital expenditure-linked activities, which the broker expects will decline 20% in 2016.

The broker also sees downside risk from Intertek’s oil production and trade-linked activities.

“The group is optimistic that a ‘normalisation’ of the oil supply will not lead to a deterioration in organic growth here, but given EIA (Energy Information Administration) estimates for no growth in production for the rest of 2016, this could prove challenging.”

However, Berenberg believes the chief executive’s focus on short-term delivery - including monthly performance reviews and weekly forecasts – is already helping boost the group’s earnings before interest, tax and amortisation margin. Organic margin at constant exchange rates increased by 60 basis points in the first half.

Berenberg has revised its earnings per share (EPS) estimate for fiscal years 2016 and 2017, by 9% and 14% respectively.

“The revisions are driven predominantly by foreign exchange after the devaluation of sterling, with constant currency upgrades of only around 1-2%.

“Our EPS revisions, combined with our view that Intertek should trade in line with historical multiples, drive our revised price target of GBp3,600.”

Shares fell 0.03% to 3,618p at 1042BST.