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.
CBI members are to begin voting today on the future of the business lobby group, following a series of scandals.
The organisation was plunged into disarray after claims of serious sexual assault were made by CBI employees against colleagues.
Today it will launch what it describes as an “ambitious ‘programme of change'”, with adjustments to its governance, culture, people processes, and refinement of its core purpose.
More than 1,000 business leaders were asked for their thoughts on the organisation’s future in surveys, focus groups, and listening sessions across the UK.
The results of the confidence vote will be revealed at an extraordinary general meeting (EGM) on 6 June.
Rain Newton-Smith, CBI director general, said “radical and rapid changes” were being made, with the organisation “well on the road to recovery”.
She added: “Our society faces serious challenges from a cost of living crisis to climate change, with an urgent need to create truly sustainable growth across regions and nations of the UK, as well as on the global stage.
“We need a strong voice of business, backed by a depth of economic analysis and insights from across the whole economy and entire country.
Rain Newton-Smith
“A renewed CBI can once again have a voice on the serious economic challenges the UK faces, with a general election approaching at pace.
“The CBI has a unique role.
“We will work in collaboration and partnership with our members on these shared challenges, which is why this programme of change is so important. There is not a moment to lose.”
Sky News revealed earlier this month that the CBI had drafted in Principia, a business ethics consultancy, to aid a review of its culture.
This week, Sky’s City editor Mark Kleinman reported that the CBI’s board had drafted in lawyers to prepare for a prospective insolvency filing.
In April, the UK’s biggest business group suspended most of its activities pending the outcome of a review by law firm Fox Williams – Ms Newton-Smith said on Wednesday that the recommendations from this review have all been “either completed or (are) in progress”.
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But some members decided the damage was already done, and suspended or ended their membership. Among those companies to quit were the Association of British Insurers, BMW Group, Aviva, and the British Beer & Pub Association.
It was all sparked by allegations made by at least a dozen female CBI employees against some of their male colleagues, which included claims of rape, stalking and harassment.
A number of the allegations are being investigated by the City of London Police.
Business
Longer lorries allowed on Britain’s roads despite fears over risks to pedestrians and cyclists
Rail passengers are set to suffer fresh travel disruption over the next few days due to more strikes in long-running disputes over pay, jobs and conditions.
Train companies are warning that services will be “severely reduced” because of industrial action by drivers and other workers.
Members of the drivers’ union Aslef will walk out on Wednesday and 3 June, while the Rail, Maritime and Transport union (RMT) has called a strike on 2 June.
Passengers are being advised to plan ahead and check the times of first and last trains.
Read more on train strikes:
Which services will be affected by industrial action this week?
Mick Whelan, general secretary of Aslef, told the PA news agency there was “no waning in enthusiasm” from train drivers to continue taking industrial action.
He said: “We are determined to get a resolution and remain in this for the long haul.
“It is time for the government to step back from interference which is preventing a deal – drivers, in line with other workers, deserve a pay rise after four years without one and inflation running over the last 12 months north of 10%.”
The strikes will affect 15 train companies, with services due to start later and finish much earlier than usual – typically between 7.30am and 6.30pm.
On the RMT strike day, around half of the network will shut down, with around 50% of normal services running.
On Aslef strike days, around 40% of trains will be running but there will be wide regional variations, with some operators running no services at all.
It is likely that evening services on some lines will be affected on the days before each strike and the mornings following strikes.
Aslef will also start an overtime ban at 15 train operating companies on 1 June that could cause disruption, especially in and out of London.
The industrial action will affect football fans travelling to London for the FA Cup final between Manchester City and Manchester United on Saturday at Wembley Stadium.
Fans wishing to travel to the game by train from Manchester have been advised not to attempt to do so on the day.
There will be a limited service on Friday due to the RMT industrial action.
A Rail Delivery Group (RDG) spokesperson said: “The upcoming rail strikes called by the Aslef and RMT leadership will not only affect our passengers’ daily commute but will also impact those travelling to and from the FA Cup final and other events across the country, causing disappointment and frustration for tens of thousands of people.
“It will also inconvenience families who have been looking forward and have planned their half-term holidays. It will also further burden our people who have already lost thousands of pounds at a time of financial strain.”
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Train strikes cause travel misery
Read more:
Number of days lost to strike action in 2022 highest since 1989
The unions say they have not been given a pay offer it can recommend to their members and support for industrial action remains strong among workers as well as the public.
Aslef says train drivers have not had a pay rise for four years.
Both unions claim the government is preventing the train companies making an acceptable offer, which ministers deny.
A Department for Transport spokesperson said: “The government has facilitated a fair and reasonable pay offer, now union leaders must do the right thing and put this to their members.”
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