Shore Capital has downgraded shares of Intertek Group PLC (LSE:ITRK) to 'sell' from 'hold' with the broker citing the 'full' valuation of the stock while acknowledging the fundamental importance and growing demand for its testing services.
The downgrade follows the release of Intertek's full-year results, which Shore described as 'exceptional'. The company's operating margin was reported at 16.6%, slightly above expectations and marking an increase from the previous year.
However, after accounting for £19.8 million in cash restructuring charges, the adjusted operating margin sits at 1%, marginally up from 15.9% in 2022.
Revenue growth on a like-for-like basis reached 6.2%, closely aligning with forecasts and indicating a robust recovery from previous disruptions caused by the pandemic and issues in China.
Looking ahead, Shore has made minor adjustments to its forecasts for Intertek in 2024, anticipating an underlying revenue growth of approximately 5.5% and aiming for an operating margin of 17%, before further restructuring charges of £20 million.
Positive outlook anticipated
This projection is based on the management's positive outlook, with expectations to reach a 17.5% margin target by the fiscal year 2025, excluding exceptional charges.
In terms of capital returns and cash flow, Intertek continues to impress, Shore said. It noted, however, that sustaining its profit margins may be tough due to necessary investments in capital expenditures and personnel to maintain competitive positioning.
Shore's analysis also addresses the dividend and valuation aspects of Intertek, pondering whether the company is better seen as a growth or income stock.
Following the announcement of a payout ratio adjustment from 2x to 1.6x starting from fiscal year 2024, the prospective dividend yield is expected to rise to 3% at the current share price.
Despite this, Shore Capital's valuation model suggests a fair value of approximately £42 per share, indicating a potential downside of 15% and leading to a price-to-earnings ratio (PER) of 18x for the current financial year, reflective of mid-single-digit growth expectations.
This reevaluation to a 'sell' rating is primarily driven by Intertek's recent share price performance, which has outperformed the market by about 20% over the last three months, without substantive changes to the company's forecasts.