Intertek Happy to See Back of 2022; Better Positioned for 2023

Narrow-moat Intertek ITRK finished off full-year 2022 soundly. While organic revenue growth of 5% underwhelmed relative to peers Bureau Veritas and SGS, an almost identical outlook for all three companies in 2023 of mid-single-digit revenue growth and operating margin progression suggests that after a tough time during Chinese lockdowns over the year, the company has finally caught up. Although we expect to update our forecasts, we don’t expect this to have a material impact on our GBX 4,900 fair value estimate. We believe Intertek is currently the most attractive opportunity in the testing, inspection, and certification segment.

A higher level of exposure to China, and in particular consumer goods, was something that buoyed Intertek for many years as investors lapped up the structural growth story. A slowdown in global consumer spending, combined with Chinese lockdowns last year, took the shine off this growth story and investors went in search of greener pastures. Although Intertek’s outlook for 2023 depends on the health of the macroeconomic environment, we believe this is an indication that investors’ fears about structural issues facing the company are overblown.

The global macroeconomic environment remains precarious, but the potential full reopening of the Chinese economy could be a boon for TIC companies, and in particular Intertek with its outsize exposure to the region, offsetting weakness elsewhere in the world. As one of only three truly globally diversified TIC firms, we believe Intertek is well placed to benefit from several other structural trends in the industry, such as increased outsourcing, implementation of further regulation, and a tilt to higher-value activities by the main industry players.