My opinion that the assurance, testing, inspection and certification services provider is a brilliant buy remains unchanged despite the chilly reception to latest trading numbers released on Tuesday. Investors reacted badly to the news that revenues dropped by a bigger-than-expected 1.8% during the January-June period, with lower year-on-year sales of £1.35bn reflecting severe currency headwinds and slowing sales at its Products and Resources divisions.
It’s worth noting, however, that organic revenue still rose 3.4% in the period. Sure, this indicates a reduction in recent months — sales on a comparable basis had increased 4% in the first four months of 2018 — but this can in some part be attributed to the loss of a working day in the last half.
Acquisitions keep on coming
The bearish sentiment washing around this week does not feel right for of a company whose sales performance remains broadly robust, and whose position in the massive global quality assurance industry (which Intertek values at $250bn) is growing thanks to its dedication to M&A.
It made another three acquisitions in the first half of 2018 to build its geographical and operational footprint, and made a huge statement with the $480m purchase of North America’s Alchemy Investment Holdings, a big player in the food industry’s people assurance segment.
It’s no surprise that the City is still expecting earnings to keep rattling higher despite the top-line reversal of the first half, although admittedly predicted rises of 2% in 2018 and 8% in 2019 aren’t enough to get pulses racing. What is, though, is the rate at which dividends are expected to advance, with current forecasts being buoyed by Intertek’s decision to hike the interim dividend by more than a third year-on-year to 31.9p.
This upsurge reflects the company’s decision last year to raise the dividend payout ratio to 50% from 2018, the ambitious target supported by its strong growth outlook and its exceptional cash generation (free cash flow clocked in at £90.6m between January and June).
Dividends striding higher
And so back to those dividend forecasts: presently the number crunchers are anticipating that last year’s total payout of 71.3p per share will jump to 90.4p in the current period, and again to 98.2p in 2019.
Subsequent yields of 1.7% and 1.8% for these respective years may be handy rather than spectacular, but the rate at which Intertek looks likely to keep growing dividends should excite the interest of long-term investors.
It’s a dead cert that Intertek’s high valuation prompted Tuesday’s 10% share price slide. And even despite the sell-off, the company still sports a forward P/E ratio of 27.2 times, almost double the widely-accepted value benchmark of 15 times.
I retain my bullish take on the business even with its still-hefty rating, however, and reckon the recent pullback is a splendid buying opportunity.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.