Intertek (ITRK) Analysis

Intertek Group is a British company active in testing, inspection and certification (the famous ISO standards). It operates in multiple sectors such as health, beauty, food, construction, energy, natural resources, chemicals and transport.

Its beginnings date back to 1885, when it began testing and certifying grain shipments to be shipped by sea. Listed on the London Stock Exchange since 2002, the company now has a network of more than 45,000 employees spread across more than 1,000 sites in around 100 countries.

Intertek is the world number three behind the Swiss SGS (world leader in the sector) and the French Bureau Veritas. SGS has been part of my portfolio for a long time and I am currently neutral on the stock. Bureau Veritas is of lower quality and has just suspended its dividend, I advise against touching its stock.

Intertek operates in a relatively non-cyclical and capital-efficient sector and generates substantial cash flow. Its geographical and sectoral diversification provide it with a certain stability and good predictability.

The balance sheet is correct (34% of equity) and liquidity is sufficient (current ratio of 1.07). Profitability is very good with a net profit margin of 10.5% and a return on equity (ROE) of 31.8%.

Growth is also there: from 2013 to 2019, turnover increased by 37% and net profit by 56%.

Such qualities have enabled the action to explode by about 1000% since its listing in 2002 and to significantly outperform its peers.

At the current price of 4726p, the dividend yield of 2.2% is rather paltry. But this dividend is extremely interesting from the point of view of its solidity and its growth. Thus, the payout ratio is very reasonable (around 54% of profits and 41% of free cash flow) and the dividend has been increased every year without exception since Intertek's listing in 2002.

The dividend has increased from 5.2p in 2002 to 105.8p in 2019! Over the last 15 years, the annual dividend increase (CAGR) has been 16.7%, a simply phenomenal growth.

If the dividend continues to grow at more or less this rate over the next few years (which I expect), that means that its yield will double approximately every 5 years! In other words, a dividend yield on purchase cost (yield on cost) of 5% is realistic in about 6 years and 10% in a dozen years.

The current PE is 24.5, a rather high valuation but justified by such quality and also reasonable from a historical point of view. The PE is estimated at 21.5 for 2020 and 20 for 2021.

The impact of the Coronavirus is very difficult to quantify precisely in the short term, but it is certain that the semi-confinement and the economic slowdown will leave their mark.

Nevertheless, Intertek's comfortable finances and defensive nature will allow it to overcome this crisis, like previous ones, without calling into question its existence.

Quality assurance, audit services, regulatory compliance and security are themes that are expected to remain in high demand over the coming decades.

That's why I view the current price weakness as an attractive buying opportunity from a long-term investment perspective.