We are sticking with our trading sell on Intertek. Weakness in the mining services business took a while to manifest but when it did, the extent of the weakness took management by surprise. This weakness is likely to persist for some time we think, halting the margin expansion that consensus was expecting. Combine this negative catalyst with a previously all time high PE multiple and you have the recipe for a few months of potential further derating (see /PE history chart). All three Testing stocks have mining exposure, ITRK c.6% sales, SGS c.16% sales and BVI c.8% sales, so no stock is immune short term – we have focused on ITRK as it was the last to react to negative developments from mining.
Multiples have derated but they are still within a whisker of previous all time higher valuations (see chart below).
Combine this with continued negative newsflow from any company related to mining services and a gap until the Testing stocks next report (SGS on 17th July, Intertek 29th July, Bureau Veritas 28th Aug) and it is difficult to find marginal buyers. The sector is a wonderful organic grower with high returns, low capital intensity and lots of fill-in M&A potential, so they will eventually grow into their multiples. They have all previous been HQGB stocks, all of which became too expensive – we would be buying them back when they are trading with 5% Y2 FCF yields. We are not there yet, another -5% for Bureau Veritas, -12% for SGS and -15% for Intertek.