Profits soar but shares plunge in Intertek – so what went wrong for the stock market darling?
Intertek is just the kind of business one would expect to see flourishing in the wake of COVID-19.
One of the lesser-known companies in the FTSE 100, in spite of having a stock market valuation of £9bn, it is the world’s biggest provider of quality assurance.
It employs nearly 44,000 people around the world in more than 1,000 offices and laboratories, providing assurance, testing, inspection and certification services to clients in sectors as wide-ranging as chemicals, food, healthcare, transportation, energy and construction.
The firm went public in 2002 and joined the top-flight index in 2009
On Friday morning it reported a 23% rise in pre-tax profits, to £186.3m, for the six months to the end of June.
However, despite what appeared to be a confident trading update, the company’s share price plunged by more than 9% at one point – wiping £849m from its stock market value.
So what went wrong?
In a word, it seems that expectations were just a little too high.
According to Oscar Val Mas, analyst at investment bank JP Morgan Cazenove, underlying earnings came in 7% lower than the market had been expecting and noted that the company had not changed its guidance to investors on profit margins for the year.
Steve Clayton, manager of the HL Select UK Growth Shares fund, which owns shares in Intertek, added: “These interim (results) were always going to be a tough act for Intertek to pull off.
“Demand has been highly volatile and only relatively recently translated into robust growth.
“But expectations for Intertek’s ability to translate any recovery into higher (profit) margins were high.
“So far, the group is lagging a little on the margin front, even though pretty much all parts of the business are now seeing demand bouncing back.
“Full year forecasts are likely to edge down, so no surprise to see the market pushing the stock lower.”
Expectations were too high and the market pushed stock lower
It is a rare setback for a company which, since going public in 2002 and joining the Footsie in 2009, has been a stock market darling.
It has a strong track record of growing both via takeovers and organically and also of predicting accurately what its customers will be demanding next.
Yet Andre Lacroix, the chief executive, insisted today he was confident demand will keep growing and said the company had “exciting growth opportunities” in the post-COVID-19 environment.
He told analysts today: “The total value of the global product assurance market is $250bn.
“Only $50bn of this is outsourced.
“Given the increased complexity in global corporations, we expect companies to continue to invest in new quality assurance areas to mitigate risk in the supply chain.
“These are what we call untapped quality assurance opportunities. And, indeed, COVID-19 has demonstrated there were major risks in the operations of our clients, which were not all mitigated.
“We expect the increased focus on quality assurance essentially in three areas moving forward – safer supply chain, better personal safety and sustainability.
“And this is why the industry is expected to grow faster post-COVID-19.”
Intertek boss Andre Lacroix is a former chairman and chief executive of Euro Disney
Mr Lacroix, who joined in May 2015 from Inchcape – coincidentally the company from which Intertek was spun out of 25 years ago – said a recent survey of customers had revealed that 87% of them were planning to invest in the next two years to strengthen their supply chains.
He said that recent shortages in supply around the world – a good example currently being how shortage in chips is hampering car production around the world – had highlighted the need for supply chains to be more resilient.
He went on: “We need to ensure health, safety and well-being for employees and consumers. COVID-19 has raised the bar for health and safety in public and factories and workplaces forever.
“And they all face higher operational complexity, which is driven by the explosion of e-commerce and, of course, the ever-faster innovation cycle.”
One area where investors appear to be concerned, in the immediate term, is inflation.
As firms put net zero plans in place, Intertek will have a vital role to play, say experts
Intertek employs a lot of specialist and highly-qualified people, such as scientists with PhDs, while it also has a policy of giving employees pay rises every year.
The expectation is that it will be seeing a high level of wage inflation.
Mr Lacroix insisted that this was not the case – pointing out that, when lots of businesses were undergoing large restructurings with a lot of redundancies during the pandemic, Intertek had deliberately not gone down that road.
He went on: “To basically reduce our capability and then start hiring again was going to be very costly and not the right thing from a customer service standpoint.
“So we are not seeing any issues with shortages of labour. We have to hire, we do it all the time, but we don’t have a huge gap in our capability.”
He said the company would be quite capable of returning to its pre-pandemic productivity level without having to take on more employees.
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And there could be another big growth opportunity in coming years, too.
As Mr Clayton put it: “There is a quiet revolution going on in business, as firms start to put net zero plans into place.
“Intertek has a vital role to play here, with its ability to provide quality assurance of supply chains and audits of key environmental performance data.
“In short, there are whole new markets opening up for the business and the shares should increasingly recognise the potential of these opportunities, as well as the issues the existing business faces day to day.”
So, a tough day for Mr Lacroix, a former chairman and chief executive of Euro Disney.
But, once the dust has settled, he has plenty of opportunities to prove to sceptics that his company’s prospects are anything but Mickey Mouse.
Business
Government is using Post Office as ‘shield’ over Horizon compensation schemes, outgoing CEO Nick Read tells inquiry
The Post Office’s outgoing CEO today agreed the government is using the company as a “shield” over compensation schemes, while giving evidence at the inquiry.
Nick Read, who resigned last month, was giving evidence at the Post Office Horizon IT Inquiry for the second day, with a focus on delays to victims’ financial redress.
Edward Henry KC, representing wronged sub-postmasters caught up in the Horizon scandal, asked Mr Read if the government “is using the Post Office as a shield or a fire curtain”.
He replied: “That could be a description, yes.”
Mr Henry continued: “The fact you’re [the Post Office] administering two out of the three schemes gives the government a degree of protection… one step removed gives it room for plausible deniability?”
Mr Read responded: “That’s true.”
Hundreds of sub postmasters were wrongfully convicted due to faulty Horizon computer software used by the Post Office between 1999 and 2015.
The outgoing Post Office boss denied the company has been instructed “to minimise or supress compensation claims whilst avoiding public scrutiny”.
Mr Read admitted, however, that the compensation process has been “overly bureaucratic” and expressed “deep regret” that the Post Office had not lived up to delivering “speedy and fair redress”.
Nick Read, chief executive of Post Office Ltd, giving evidence to the inquiry. Pic: PA
However, he insisted the “approach” and way of “engaging” with victims has changed in the last few months, with “lessons learned” since the start of the year.
“I think we are genuinely open and moving towards a better system,” Mr Read told the inquiry. “There are proper appeals processes, proper independent panels now working.”
He added there is a “commitment… to get this right,” and said he believes “things will start to flow” despite “mistakes hav[ing] certainly been made”.
Keep up with all the latest news from the UK and around the world by following Sky News
Mr Read also addressed the “terrible” fact that hundreds of sub-postmasters have died before receiving compensation.
A total of 251 people have died without getting full financial redress, according to data cited at the inquiry.
Nick Read insisted “a lot of time” has been spent “trying to work out how do we improve and speed up the process”, adding it was a “constant point of conversation” with the government.
Read more:
Post Office faces another software scandal
Alan Bates threatens legal action
CEO says ‘I don’t need to clear my name’
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Alan Bates ‘not heard word’ from govt
Mr Read said it was “astonishing” the Post Office was involved in the administration of compensation schemes and said the “corporate view” was that the Post Office should not have anything to do with them.
When asked why that view was not communicated to the inquiry in meetings, Mr Read responded: “It’s a good question. I’m unsure why we didn’t make that very explicit…clearly we should have done.”
He said the lack of communication on this was a “failure”.
Mr Read also today told the inquiry how Post Office employees “implicated” in the Horizon scandal may “still be operating at the heart” of the business.
The inquiry continues.
Hundreds of employees of the digital bank Monzo are being given the opportunity to sell part of their stakes in the company as its valuation soars to £4.5bn.
Sky News has learnt that Monzo notified staff on Thursday that it was launching a secondary share sale backed by a number of the world’s leading technology investors.
Sources close to the deal said employees were likely to sell tens of millions of pounds-worth of stock as part of the deal, which is being launched less than three weeks before Rachel Reeves, the chancellor, is expected to increase the rate of capital gains tax in her inaugural budget.
Monzo, which has more than 10 million customers, has become one of Britain’s most successful, and valuable, fintech companies.
It employs more than 3,700 people.
Earlier this year, it raised more than £500m by selling newly issued shares to a group of investors led by Capital G, a division of Alphabet-owned Google.
That primary share sale valued the business at £4.1bn.
The latest share sale is understood to involve existing Monzo investors StepStone Group and GIC, the Singaporean sovereign wealth fund, buying stock from employees.
One insider said it would set a new floor for Monzo’s valuation as it progresses towards an initial public offering at some stage in the next couple of years.
Founded in 2015, it is now profitable and has diversified into investments and instant access savings accounts.
In recent months it has also launched pensions products and accounts aimed at under-16s.
Monzo now ranks as the seventh-biggest bank in Britain by number of customers, with one in five adults and one in 16 businesses now banking with it.
The company is among a new generation of banks which have emerged since the last financial crisis and begun to accumulate a significant share of the UK retail banking market.
Read more business news:
Chancellor warned taxes may ‘need to be raised by £25bn’
Post Office CEO says he doesn’t need to clear his name
Human trafficking charges against Stagecoach tycoon dropped
Keep up with all the latest news from the UK and around the world by following Sky News
Rivals include Starling Bank and Revolut, which was recently valued at $45bn and has just been awarded a banking licence by British regulators.
Monzo has recovered spectacularly from a difficult period when it emerged that the City watchdog was investigating it for potential breaches of anti-money laundering and financial crime rules.
It has revamped its corporate structure as it pursues an international expansion strategy that will serve as the prelude to a stock market listing.
Monzo Bank Holding Group was established to avoid the company facing punitive capital treatment by British regulators as it launches in new overseas markets.
Other Monzo investors include the Chinese group Tencent, Passion Capital, Accel, General Catalyst and Hedosophia.
Monzo is run by TS Anil, its chief executive, and chaired by Gary Hoffman, one of Britain’s most prominent bank executives.
A Monzo spokesperson declined to comment.
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