Shore Capital gave a knock to Intertek Group PLC (LON:ITRK) on Friday, downgrading its rating for the testing and inspection certification firm to ‘sell’ from ‘hold’ as it now anticipates a slightly negative earnings performance for full-year 2020.
In a note to clients, ShoreCap’s analysts pointed out that the FTSE 100 listed firm is due to report full-year 2019 results on March 3 which should see “robust development across its operations”.
READ: Intertek sees second-half pick-up in growth
The analysts said that “as always we expect to see some differences in the growth mix, but with good recovery coming through in the mix and with firm margin progress.”
However, they have reduced their full-year 2020 revenues by around £70mln at this stage, which reduces their EBIT estimate by around £30mln to £525mlm.
They highlighted a group margin reduction of 60 basis points (bps) to 17.3%, with the EBIT margin for full-year 2019 forecast at 17.8%.
Their pre-tax profit forecasts for 2020 falls back by 6% to £486mln, down from £516mln, which takes adjusted earnings per share (EPS) to 209p from 223p.
The analysts also lowered their full-year 2021 forecasts, taking a cautious view, with EPS falling by 5% to 226p from 237p, albeit with growth remerging.
They added: “Until greater guidance with visibility emerges, we can’t rule out further forecast reductions.”
Significant exposure to China
The analysts concluded: “We like Intertek and believe that Group has solid long-term prospects in a market-driven by technology evolution and by ratcheting up compliance and regulation. However, with significant exposure to revenue flow from China, with the Coronavirus economic effect likely to impact Intertek with negative operational leverage, we feel we must cut our forecasts for the current year.”
“Intertek has said little so far on the issue (there is an update on its Media section of its website) and given no guidance – we expect this to follow with the FY results. In the context of the shares trading close to all-time highs on high 20’s PER multiples for the current year, on now forecast flat EPS growth (awaiting clarity on guidance),” they added.
The analysts said a discounted cashflow (DCF) analysis of Intertek suggests a fair value level of around 5,200p per share at present, factoring in potential for further forecast reductions.
They recommended investors to “take profits”, with the Intertek shares currently trading at 5,798p, down 1.5% on Thursday’s close.