In an upbeat market ahead of the US Federal Reserve’s latest report, the day’s biggest gainer was Intertek.
The testing equipment business jumped 131p or 5% to £27.09 after a positive note from JP Morgan Cazenove, following a meeting with the company. The bank repeated its overweight rating, and analyst Robert Plant said:
Wolfhart Hauser (chief executive), Sarah Ogilvie (investor relations) and Richard Treacher (investor relations) presented to the JP Morgan sales team [on Tuesday]. It was an interesting meeting and it seemed to us that, after a weak first half of 2014, trading should improve somewhat in the second half and then into next year.
Organic revenue declined by 0.5% in the first half of 2014 and management reiterated the guidance from the results presentation that the outlook for the second half was better and that there should be growth in the range of 2% to 3%. One of the main drags of performance has been Minerals (around 4% of revenue) and this is still expected to see a decline in the second half but should flatten in 2015 and then improve in 2016. We note that the outlook for Minerals at Intertek is more subdued than that set out by [rival] SGS during their China trip last week but the businesses do have different product and geographic exposure and Intertek was impacted especially by the nickel export ban in Indonesia. Management said that the decision to exit low margin training contracts in the Industry & Assurance was likely to have a 2% drag on growth but that this process was nearly over.
Longer term the organic revenue growth potential of the business is probably 7%, within a likely range of approximately 4% to 9%. This growth is less than in previous cycles, mainly as global GDP growth is likely to be lower and also due to less inflation in emerging markets, where we think Intertek will have benefitted from passing on higher wage inflation.
Intertek is still looking at small to medium sized acquisitions but noted that prices for some of the larger acquisitions, especially those sold by private equity, are too high. Intertek is keen to become larger in food testing in particular, which has revenues of £50m (2% of total group revenues) but could become a £200m revenue business. Testing in areas including the Environment, Non Destructive Testing, Aerospace & Defence and Finance were also mentioned as areas where Intertek could be keen to develop/expand a presence. Share buy backs or higher dividends could also be considered, although Intertek is more likely to find enough small and medium sized acquisitions.
We have an overweight on Intertek. A negative case could be that the shares are still quite highly rated on a 2015 estimated PE of 16.7 times, given the pattern of earnings reduction in recent years and the lack of organic revenue growth in the first half of 2014. However, we think organic revenue growth has reached a turning point, and will benefit from the end of the process of exiting lower margin training contracts and minerals will be less of a drag. Intertek is also cheaper than the other testing companies.
Overall the FTSE 100 finished 51.70 points higher at 6453.87, despite the US central bank being widely expected to end its monthly bond buying programme. Investors believe the Fed will keep to its dovish comments about maintaining the current low level of interest rates.
Tui Travel added 12.7p to 395.4p after shareholders gave the go-ahead for its merger with parent company Tui AG.
Miners had a mixed day, with Anglo American adding 8p to 1352.5p after Morgan Stanley raised its target price but Rio Tinto losing 37p to 2986.5p.
Retailers were under pressure after Next warned on profits but came back from their worst levels. Next edged down 20p to £64.15 while Marks & Spencer slipped 2.6p to 404p.
Capita closed down 75p at £10.82, the biggest faller in the FTSE 100, as it lost out to rivals including Interserve in a contract to run UK rehabilitation centres.
