SGS: 2023 Looking Bright for This Testing Giant

Narrow-moat testing giant SGS SGSN reports just twice annually, which leaves some guesswork to fill the gaps between. However, recent reports by peers Bureau Veritas and Intertek suggest positive momentum in the testing, inspection, and certification sector. The former reported organic revenue growth of 8.5% for the first quarter, and the latter 6.5% to the end of April. We view SGS shares as attractive currently, with solid upside to our CHF 95.20 fair value estimate.

As China reopens fully after sporadic lockdowns this time last year, companies like SGS should be seeing a boost in their consumer product businesses, as Intertek recently reported. The global macroenvironment remains precarious, but the potential full reopening of the Chinese economy could be a boon for SGS in the coming 12 months, offsetting weakness elsewhere. As the largest of only three truly globally diversified TIC firms, SGS is also well placed to benefit from several other structural trends in the industry, in our view.

Increased outsourcing has been unfolding for many years in the TIC sector; figures show that half of all TIC activities are still occurring in-house, meaning the ceiling for growth here is massive. Likewise, the tilt to higher-value activities is much of the explanation for our relatively bullish view on margin growth over the next few years. One more recent trend that global TIC firms are benefiting from is the derisking of supply chains, as global firms seek to establish second and third sources of production to limit the potential disruption from issues such as pandemics. All of these trends combined point to top-line growth above GDP levels over the coming years for TIC players such as SGS.