German broker Berenberg and US investment bank Goldman Sachs have both downgraded their recommendations for blue chip testing, inspection and certification (TIC) firm Intertek Group PLC (LON:ITRK) on valuation grounds today.
In a note on the European TIC sector, raising price targets across the board, Berenberg cut its stance for the FTSE 100-listed firm to ‘hold’ from ‘buy’ while upping its target to 4,450p from 4,000p following what it called the stock’s “deserved” re-rating this year.
Around mid morning, Intertek shares were off 0.6%, or 25p to 4,192p.
READ: Intertek weak as tough Resources business offsets solid revenue growth and news on target for 2017
Berenberg’s analysts said: “After a strong share price performance at Intertek since we upgraded in January (23%) we see limited near-term upside and downgrade to hold.”
Overall, however, they said: “We conclude that growth in the TIC sector is starting to improve, and we are now optimistic regarding a more meaningful acceleration in 2018.”
The analysts added: “We estimate organic revenue growth for the sector in H117 will improve slightly to 2.4% versus just 1.1% in H216.
“Whilst growth in H217 is unlikely to see a material acceleration (we estimate 3.0%) we are now more optimistic for 2018 when we see the sector returning to attractive levels of organic growth (we estimate 5%).”
Oil & Gas markets have been a drag
They added: “The recovery should be driven by an improvement in the oil and gas end-market, which has been a drag since 2014 when oil majors cut capex following the fall in the oil price.
“However, looking at 2017, consensus estimates for capex from the integrated oil majors has improved materially since the beginning of the year.
“Indeed, when we published in January consensus estimated a contraction of 2% for 2017, whereas now consensus is forecasting an increase of 7% which we think will benefit the TIC sector in 2018.”
They concluded: “Our new estimates for the sector in FY18 now reflect growth in oil and gas inspection related activities of c6%.”
EPS growth "fairly reflected in current valuations"
Meanwhile, Goldman Sachs also downgraded its rating for Intertek this morning citing valuation grounds as well.
The US broker cut its stance to ‘neutral’ from ‘buy’ having left its target price unchanged at 4,580p while modestly raising its estimates for foreign exchange updates.
In a note to clients, Goldman’s analysts said: “We continue to expect an improving mix towards higher-margin Products (along with a progressive easing of declines in Resources) to drive 5% organic EBITA growth over 2018-20.
“If Intertek were to deploy excess cash via M&A, we believe EPS growth could reach double digits over the same period. However, this looks fairly reflected in current valuations”.
-- Adds Goldman downgrade, updates share price --