Total Quality Assurance provider Intertek (LSE: ITRK) has released a positive update which shows that it’s making excellent progress. Sales rose by 18% in the 10Â months to 31 October, with weak sterling contributing 8% of this. However, Intertek continues to perform well on an underlying basis, with its top line rising by 10% on a constant currency basis. As such, it looks set to deliver a rising share price over the medium term.
Intertek’s growth rate was boosted by the performance of its high margin Products division. It recorded sales growth of 22% at constant exchange rates and 33% when the positive currency translation from weaker sterling was factored-in. Furthermore, recent acquisitions contributed around £200m of additional revenues, while Intertek was able to grow organically too. For example, its Products division recorded a rise in sales of 5.5%, while its Trade division’s sales were 1% higher.
However, Intertek’s Resources division saw sales decline by 13%. This was due to the challenging operating environment within the industry, which is showing little sign of abating anytime soon. Encouragingly for Intertek’s investors, the Resources division contributes less than 10% of the company’s earnings and so further declines there are unlikely to severely impact on its medium-term growth outlook.
Intertek is on track to deliver on its 2016 target of robust revenue growth at constant exchange rates. Its margins are due to remain stable throughout the year and this is expected to yield bottom-line growth of 14%. Looking ahead to next year, Intertek’s earnings growth is expected to remain in double-digits, with growth of 11% forecast by the market. Despite such an upbeat growth outlook, Intertek trades on a price-to-earnings growth (PEG) ratio of just 1.6. This indicates that it offers a wide margin of safety, as well as significant capital growth prospects.
Tough times
This contrasts with sector peer Mitie (LSE: MTO). It issued a profit warning yesterday, as well as the writeoff of its healthcare assets. Mitie’s bottom line is expected to fall by 19% on an adjusted basis in the current year, which perhaps underplays the challenges which it faces.
Although the company has a new CEO who is likely to have the scope to make major changes to the business, Mitie will take time to deliver improved performance and could experience challenges during a turnaround period. Furthermore, the UK economy continues to face a high degree of uncertainty due in part to Brexit. This could make the task of improving Mitie’s performance a rather more difficult one.
As such, Intertek remains the superior buy of the two support services companies, with its low valuation, high growth rate and relatively consistent performance likely to prove popular among investors. And with the potential for further weakness in sterling as Brexit becomes a reality, Intertek seems to be well-placed to record upbeat performance and substantial capital gains.