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.
Getir, the grocery delivery app, has abandoned a European expansion that is set to result in the loss of about 1,500 jobs in the UK.
Sky News had previously revealed that the Turkey-based company, which means “to bring” in Turkish, had successfully raised money from investors to fund its withdrawals from the UK, Germany and the Netherlands.
It had already departed other countries including Italy and Spain.
The exits were prompted by growing losses linked to the company’s rapid expansion.
Its UK competitors include Deliveroo and DoorDash.
The restructuring will leave Getir, which had a peak value of $12bn at the height of pandemic-linked demand, as a business focused on its domestic market.
Getir said it was to retain its US arm FreshDirect – only bought a few months ago.
The company was yet to confirm exactly how many were to lose their jobs across the UK operation.
It is understood that it employs up to 1,500 people. They include warehouse staff, managers and riders.
Getir’s commercial partnerships include a sponsorship deal with Tottenham Hotspur. Pic: Pic: Alex Morton/Tottenham Hotspur FC/Shutterstock
In a statement on Monday, Getir said its non-Turkish business was accounting for only 7% of its revenues.
“Getir has raised a new investment round, led by Mubadala and G Squared.
“Getir will utilize these funds to bolster its competitive position in its core food and grocery delivery businesses in Turkey.
“Getir expresses its sincere appreciation for the dedication and hard work of all its employees in the UK, Germany, the Netherlands, and the US,” it concluded.
The cost of bread, biscuits and beer could increase this year due to the impact of the unusually wet autumn and winter on UK harvests.
Research suggests that production of wheat, oats, barley and oilseed rape could drop by four million tonnes (17.5%) compared with 2023.
The wet weather has resulted in lower levels of planting, while flooding and storms over winter caused farmers more losses.
The predictions come just as the rate of price increases on many food items begins to slow as inflation falls.
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The Energy and Climate Intelligence Unit (ECIU) analysed forecasts from the Agriculture and Horticulture Development Board (AHBD) and government yield data.
It found a “real risk” of beer, biscuits and bread becoming more expensive if the poor harvest increases costs for producers, according to its lead analyst Tom Lancaster.
Beer prices could be affected because the wet weather is still disrupting the planting of spring crops such as barley, the ECIU said.
And potatoes might also see a price hike in the coming months, with growers warning of a major shortage in the autumn due to persistent wet weather.
Planting of this year’s potato crop has been delayed across much of northern Europe.
“It’s had a massive impact on us,” said Lincolnshire farmer Colin Chappell.
“We went through the winter with virtually nothing viable drilled, and while it’s now dry enough to plant some fields some of them are so bad I don’t think they’ll get drilled this year. The situation is very hit and miss.”
The National Farmers’ Union (NFU) said recently that extreme weather was one of the biggest dangers to UK food security.
Warmer and wetter winters similar are predicted to become more common as the climate warms.
Trouble planting barley could feed through to a more costly pint. Pic: iStock
Drop in production could be more than five million tonnes
The total drop in production could even be more than five million tonnes (21.2%) when compared with the average harvest for 2015-2023.
Wheat production could be particularly hard hit, according to the research, with an estimated fall of 26.5% compared with last year.
It’s because the milling wheat used for bread has higher quality requirements that will be harder for farmers to achieve with wet weather.
The owner of Kingsmill and Ryvita, Associated British Foods, warned last week of potential price hikes if the cost of grains in the UK aren’t offset by bigger harvests abroad.
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The ECIU’s Tom Lancaster said the government’s green farming schemes are vital in “helping farmers to invest in their soils to allow them to recover faster from both floods and droughts”.
With half of food coming from abroad, he said foreign farmers would also need support.
“Moving faster to net zero emissions is the only guaranteed way to limit these impacts and maintain our food security,” he added.
William Kendall, the farmer behind Green & Blacks chocolate, said “regenerative farming methods” were also important as they “greatly enhance the soil’s capacity to hold water and therefore prevent saturation”.
“Not only does this mean better crops, produced at a lower cost for the farmer,” he said, “but it ensures that the chances of the flash flooding downstream we have seen this winter are greatly diminished”.
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