Having surged in value over the past two years, shares in Intertek and Rotork experienced some results-day weakness. Graeme Evans looks at why.
After record share price highs in recent weeks, there was always the danger that FTSE 100 quality assurance firm Intertek Group and smaller engineering company Rotork would find it hard to please investors with their results today.
And so it has proved with share price losses of more than 6%, even though their results underlined progress and did little to alter analyst sentiment.
Shares in Intertek, whose network of 1,000 laboratories and offices covers the testing of products, processes and systems in more than 100 countries, have been one of the stand-out performers in the FTSE 100 Index.
They've doubled in value since the start of 2016, with the blue-chip stock nearly 30% higher between late March and the end of last month.
Investors have been attracted by the company’s strong record of growth in shareholder returns over several years. It's also just unveiled a new dividend policy targeting a payout ratio in the region of 50%, meaning today’s interim award increased by 35.7% to 32.1p a share.
The driving force behind Intertek trading's performance continues to be margin accretive revenues growth, with a focus on strong cash conversion and disciplined capital allocation.
Its half-year results showed further revenues momentum, with the figure of £1.35 billion up 3.9% at constant exchange rates. The products and trade-related divisions, which account for 94% of group earnings, achieved growth of 4.9% and margin expansion of 40 basis points at constant rates.
The company estimates the total global quality assurance market is worth $250 billion, of which only $50 billion is outsourced. That presents a big opportunity to capture potential business that is currently managed in-house.
But shares gave up a slice of their gains today, driven by disappointment in some quarters at the level of profits and revenues progress.
Despite organic revenues growth of 3.4% being slightly weaker than it expected, JP Morgan Cazenove remains overweight on Intertek with no change to its price target of 6200p. Jefferies is at 6050p, while Shore Capital is a "hold" at 5870p.
Rotork shares have followed a similar trajectory to Intertek, with the small cap stock up 53% in the past year.
Bath-based Rotork, which operates in markets where the flow of gases or liquids needs to be controlled, has been on the recovery trail ever since falling to 156p in February 2016.
Its progress was highlighted today when half-year revenues and profits came in ahead of consensus, with the latter figure being 10% stronger than forecasts at £65 million. CEO Kevin Hostetler said favourable market trends had continued, backed by several large orders in the first quarter.
An ongoing review into six areas of the business has also highlighted the potential to accelerate growth through innovation and service, funded by restructuring and the consolidation of its supply chain.
But shares fell back more than 3% today, with Deutsche Bank believing that shares now look to be up with events. They pointed out that Rotork trades on a 19.4x valuation earnings multiple, compared with the sector on 14.6x.
However, UBS is more positive and said Rotork was well positioned in the right markets, alongside the potential for further margin improvement.
"The strategic review reaffirms our conviction that the company can return to operating margins of 25%."
UBS, which recently named UBS in its list of top 20 European small caps, has a price target of 370p.
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