⏩ Speedy thesis #9: Intertek and UVV
Stocks that pay a dividend while you wait for capital appreciation.
Speedy thesis works as a starting point for investment research: presenting potential opportunities and helping readers to do further research on companies and stocks that fit into their own (dividend investment) strategy.
In the issue number nine, I have included two companies, that are very far from each other.
A | Intertek - ATIC-services. Dividend yield 2.6%.
B | Universal Corp - leaf tobacco trader. Dividend yield 6.4%
A | Intertek ($ITRK)
🔑 Favourable industry and competition, high returns on capital, good margins.
📉 Lack of catalyst to ignite growth again, fairly high valuation.
Intertek in a nutshell: Intertek provides quality assurance, testing, inspecting and certification services (ATIC). The company employs 44 000 employees in 100 countries. Revenue £3.2 billion in 2022. The revenue is split between three segments followingly: Products 63%, Trade 20% and Resources 17%. Products segment brings in 80% of the profits.
Founded: 1996, origins going back to 1880. IPOed 2002.
Investment thesis in brief: Intertek operates in a growing and stable industry, has a strong balance sheet and excellent margins and returns on capital. It has similar or better margins and returns on capital than its peers but trades at slightly lower multiples. Intertek pays a modest well-covered dividend.
Share price / Market cap: £41.2 / ~£6.5 billion.
Closest peers: Eurofins (ERF), Bureau Veritas (BVI), SGS (SGSN).
ATIC-companies provide different kinds of services for companies and public organizations to ensure integrity of products, services and operations. The largest untapped potential for ATIC-companies is the work that their potential customers do in-house ($200 billion). According to Intertek the outsourced market size is $50 billion. Good market overview here.
Bull case 🐂
Industry characteristics: Long-term growth (3.2% CAGR until 2028, source) with multiple supporting trends, fairly low capital requirements, still rather fragmented industry, non-cyclical nature independent on clients' volumes.
Competition: The 4-6 key players have somewhat different strenghts and focus areas in terms of geography, provided services and served industries.
Excellent returns on capital: 18% ROIC, ROE 25.2% and ROA 8.8%. Higher than for the admired rival Eurofins, similar level as Bureau Veritas. The returns on capital of Intertek peaked in 2016 nearly twice higher than the level today. For the past three years Intertek's working capital has been negative.
Low indebtness of 1.1x net debt to adjusted EBITDA.
Stable margins: GM 55-58%, EBITDA 18-22%, EBIT 13-16.5%. Similar to its peers.
Growth: Since its IPO in 2002 the company has grown its revenue and EPS at 10-11% CAGR. However, 3-year revenue CAGR 2.2% and EBITDA 4.4%. EPS has remained at the same level. Intertek needs to showcase better growth for the stock to appreciate in price.
Valuation💰
LTM P/E 22.5x, NTM P/E 18x. All of the peers are trading at higher multiples. That hasn't been always the case in the past decade.
EV/EBIT is historically at very low level, around at the same level as in covid bottom, currently at 15.6x with a 10-year mean of 19.2x. All the peers, except SGSN, are trading at the same level measured by EV/EBIT.
MC/FCF stands at 17.1x, 10-year mean of 24.2x. Clearly lower than the peers: ERF 24.1x, BVI 17.3x and SGSN 20.7x.
Intertek has the highest FCF-yield of the peer group, 5.8%.
Dividend yield 2.6 %. Payout ratio 59%. SGSN and BVI pay a higher dividend of 4% and 3.3%. Intertek's dividend has remained flat for the past four years.
Average target price: £46.
Bear case 🐻
Valuation is not particularly cheap but it's reflecting the industry characteristics and quality level of the company. However, the growth pace of the company seems to have stagnated, which doesn't necessarily support high multiples. The decline in multiples could be reflecting the slow down of growth.
In terms of revenue the peers are larger in size ranging between 5-6 billion euros. The peers have 50-100% more employees.
It's difficult to identify a clear moat. ASIC-companies enjoy long-term customer relationships, demand driven by regulation,
Intertek and all the peers engage in bolt-on acquisitions to expand their geographical and service scope. Latest acquisition Intertek made was in April 2023 without disclosing valuation multiples . Therefore it's difficult to judge the impact of the strategy.
A large chunk of Intertek's cost base is personnel costs (>50%), which in case of high wage growth could pressure the margins.
1/3 of the revenue is generated in the U.S. and 1/5 in China. Re-opening of China can work as a short-term catalyst with a lag.
Summary: There are several good companies in the ATIC-segment. Eurofins has been one of the favourites and has grown by utilizing debt and own shares. Intertek follows a bit different strategy. A recent small dip in the share price could be a good entry point. However, it is difficult to see a single catalyst propelling the company to better growth. Enhanced performance of the two smaller segments could be one. Nevertheless, Intertek is a good candidate to a portfolio emphasising quality and dividends.
B | Universal Corporation ($UVV)
🔑 High dividend, dividend aristocrat, a leader in oligopolistic position, unnoticed transformation, close to tangible book value, no analyst following.
📉 Low returns on capital, declining industry outlook, increased debt position.
The summary below is generated by Chat GPT from my analysis, with a few modifications.
Bull case 🐂
Universal Corporation operates in an oligopolistic market position, providing an opportunity to increase market share and offer additional services.
The company is diversifying into non-tobacco segments such as Ingredients Operations, which has shown some growth potential.
Universal has capabilities to supply nicotine for new generation products (NGPs), a rapidly growing category.
The stock pays high and growing dividends, making it an attractive addition to a dividend income portfolio.
The company's stable earnings, rising dividend, and tangible book value support a profitable investment opportunity.
Bear case 🐻
Universal's core market of tobacco is in a secular decline, posing a significant long-term risk to the company.
The company's diversification efforts into non-tobacco segments have shown mixed results, with lumpy revenue development. Diversification has led to higher debt load.
The stock's price volatility could make it an opportunistic purchase. I believe a good entry point is closer to $45 which is also tangible book value per share and a fair value based on 10-year average EPS, historical growth rates and 10% target rate of return.
The company's high capital intensity and low returns on capital limit its growth potential and may not justify higher multiples.
The dividend growth rate could slow down if the company fails to profitably grow its Ingredients business, leading to a less favorable outlook for dividend investors.
My analysis on Seeking Alpha for more information. UVV 0.00%↑
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