Promise of growth to come makes Intertek worth testing out

Whitbread shows its vulnerability; Continuing problems make SIG one to avoid

Intertek testing Services was one of the floats that actually managed to get away in the great IPO carnage this spring. The company tests, certificates and inspects products such as toys, textiles and chemicals and was seen as a stable performer with a decent track record. The shares were priced at the very bottom of the range at 400p and achieved an immediate 8 per cent premium on their first day of dealings. Though they fell below the issue price in July as markets continued to slump they recovered during the August rally.

The stock rose another 21.5p, or 5 per cent, to 448.5p yesterday on the company's maiden results as a publicly quoted company and there looks like there could be more growth to come. UBS Warburg has a 480p price target for the shares while Morgan Stanley is looking for 490p.

As you'd expect with a set of numbers delivered so close to the float the results contained no surprises with underlying operating profit for the six months to June up 16.7 per cent to £37m. Going forward the market reckons Intertek can increase margins and add bolt-on acquisitions that will give it stronger market positions in key areas such as the oil industry and electronics.

The best performer was the group's Labtest division which provides testing and inspection services for the consumer goods industries. The worst area was Caleb Brett, which operates in the oil and chemical sectors that have been hit by oil company cut backs and rising costs of bidding for new work.

The biggest worry is the Foreign Standards division, which helps governments and standards bodies check that import duties are properly declared and that imports comply with local standards. A big contract with Saudi Arabia is up for renewal while another with Nigeria has only been renewed until next year.

Intertek is looking mostly for organic growth but having paid down debt with the £245m float proceeds it is on the acquisitions trail. It is in talks regarding a couple of small deals at the moment though they are likely to be modest, £10m to £20m transactions.

Assuming full-year profits of £50m the shares trade on a forward price-earnings ratio of 19, falling to 17 the following year. Worth a look.

Whitbread shows its vulnerability

Ever since Whitbread bid farewell to its heritage, selling off its brewery and pubs, the leisure group has struggled to regain its credibility. A national icon was replaced with a muddle of brands, many hailing from across the pond.

What Whitbread's management, led by the vocal hands-on chairman, Sir John Banham, considers a portfolio of budding concepts, poised within a burgeoning leisure market, looks to investors like a dangerous play on the whims of the UK consumer. This explains the fall in the share price in the past few months and the danger of following Sir John's example and making the stock a key constituent of any share portfolio. Indeed, he boasts he has half of his pension tied up in the company's stock.

On the plus side, the group has chosen segments of the leisure market that grow faster than beer and old-style boozers. David Lloyd Leisure, the fitness and rackets club pitched at families with deep pockets, has gone from strength to strength under Whitbread's ownership. The 6.3 per cent rise in underlying sales for the first 22 weeks of the year underlines the point.

Budget hotels, too, was an inspired choice, especially in these tougher economic times, with even business executives forced to trade down. Hence the 6.5 per cent improvement at Travel Inn. Even the 1.9 per cent fall in sales at Marriott – which together with Travel Inn contributes just under two-thirds of group profit – wasn't too bad considering the travel slump.

The worry is where Whitbread goes from here. The group may trumpet its new aggressive approach to managing businesses and driving value. But with its future staked on brands such as Beefeater (where sales were up by just 1.5 per cent) questions remain. Of the five brands singled out yesterday, just two beat the group's 5 per cent like-for-like sales target.

Given the group's limited growth prospects outside the UK, where it does not have the franchise to Marriott, and its poor track record on acquisitions, its future does not look very bright. The shares, up 5 per cent to 556p, lag the sector on a p/e of 11 times, which looks about right for now. Avoid.

Continuing problems make SIG one to avoid

The roof sprang a leak at SIG, the building products group, yesterday as its interim results were greeted with an 11 per cent fall in its share price. Not only were the first-half results disappointing, but the company, which sells things such as roofing and insulation materials, warned that difficult trading conditions can be expected to hit the rest of the year.

For the six months to 30 June, pre-tax profit was down 14 per cent at £19.8m. The cause of concern is sluggish demand, especially in the German market and also the "commercial interiors" business, which accounts for about a quarter of group sales.

Apparently, although the building of commercial property continues at a decent enough pace, developers are failing to find tenants – presumably because of the economic slowdown.

SIG's problem is that it supplies products such as ceiling tiles and partitions, which are generally only put in once a building is let – the tenant often chooses such fittings. Underlying sales in this division, which is SIG's most profitable, declined 7 per cent. This situation is expected to continue into the second half.

In Europe, SIG said conditions were weaker than last year, with sales edging up just 1 per cent but operating profit was down.

The German construction market has been appalling and SIG could not escape. Indeed it saw costs rise as it put extra resources into the country to take advantage of competitors' woes.

Analysts have cut full-year profit forecasts with ING Charterhouse, the house broker, going from £55.5m to £50.4m. With the stock down 24p at 204p that puts it on a forward multiple of 7. That's cheap but given SIG's continuing problems, the shares are best avoided.