Investment Column: It's all about health and safety at Intertek

Rentokil Initial; Hornby

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The Independent Online

Our view: buy

Share price: 1,990p (+75p)

Companies are not usually fond of new regulations, as they often bring new costs. But new rules mean more business for Intertek, whose stock-in-trade is testing the quality and safety of products to make sure that they meet the required standards.

Yesterday, it posted what analysts regard as strong half-yearly results. Beyond the headline figures – group revenues were up 17 per cent, while pre-tax profits rose by 14 per cent – we were particularly encouraged by the divisional breakdown.

The commodities business, which provides services such as independent cargo inspection, grew operating profits by around 20 per cent, while the industry and assurance arm, which is being bolstered with the integration of the recently bought Moody International technical services business, proved even stronger.

On the downside, the consumer goods division, which serves the textiles and toys industries, was not as strong, with revenues rising, but operating profits and the operating margin easing. Part of this was down to weakness in China, which offset strong growth in Turkey, Vietnam, Bangladesh and Korea. And although this may prompt concern in some quarters, we think Intertek's international spread should help it to regain its composure, not least because it has been investing in new facilities and activities.

In fact, the company's international reach, and the diverse nature of its operations, are its most attractive features. This means that it is well placed to live through temporary weaknesses in one sector or geography, something that is particularly valuable in light of today's changeable economic backdrop.

The valuation is also supportive. Although at first glance it may look a tad pricey at nearly 19 times forward earnings, it is important to remember that Intertek still lags behind its closest peer, SGS, which trades on more than 20 times. The strong growth, coupled with the valuation gap, give us confidence to keep buying.

Rentokil Initial

Our view: avoid

Share price: 89.5p (-2.3p)

It has been a tricky few years for Rentokil Initial, and despite promises of an imminent turnaround, it is not yet time for any but the most harum-scarum of investors to take the plunge.

Although it saw a first-half revenue boost from its textile and pest-control businesses, Rentokil posted an overall drop in pre-tax profits last week. The problem is its City Link parcel delivery operation, which saw operating losses nearly triple to £17.8m after more than three years in the red.

True, Rentokil Initial chief executive Alan Brown blamed lost customers and the winter snows for City Link's tardy turnaround. It is also true that the new City Link management team of David Smith and Robert Peto – both from Royal Mail – does inspire confidence. And the results did come in marginally higher than analysts' expectations.

But Rentokil Initial's forecast of a return to profit in the fourth quarter and a possible dividend next spring does not convince us yet. It is just the latest of a string of such promises from a company that has not paid a dividend since 2008.

That said, the shares, which have underperformed the market by 23 per cent over the past 12 months, are already pricing in a hefty slab of risk. So, although Rentokil Initial is one to avoid for the moment, it is worth watching nonetheless.


Our view: buy

Share price: 137p (+0.75p)

A profit warning is not the best way to start the year, but that is what happened with Hornby in January. Part of the cause was supply shortages, so the news – released with its full-year results in June – that the issues had been resolved was a major relief.

Yesterday's interim management statement from the toy maker confirmed that the supply-chain problems had not re-emerged, a major boon considering that it is hoping to benefit from London 2012 fever with a number of tie-in products. The company also revealed that it was enjoying a year-on-year sales rise in both the UK and the rest of Europe.

House broker Numis is predicting a full-year pre-tax profit of £7.4m, which would be £3m ahead of the previous 12 months. Much will depend on Christmas, but the resolution of supply-chain issues, plus the expected boost from next year, points to a positive outlook for the shares.