Morningstar | Certifiably Solid Results From Narrow-Moat SGS
Testing giant SGS produced a set of full-year results almost bang in line with our expectations and just a touch below consensus estimates on the revenue and net income lines. Organic revenue growth hit 5.3% over the period, the highest since 2012. We do not expect to make any material changes to our longer-term forecasts on the back of these results. As such, we reiterate our CHF 2,170 fair value estimate and narrow moat rating.Divisionally, 2018 heralded a return to positive organic revenue growth for the industrials business following three straight years of decline as the business’ outsize exposure to capital expenditure oil-related activities weighed heavily on revenue and operating margins. Historically, industrials has been one of the largest businesses in the SGS portfolio, generating an average 15% of group revenue over the last decade. Thus, a return to growth in this segment, driven by a refocus on more operational expenditure-related activities and a slow recovery on the capex side, should help to drive operating margins back towards double-digit levels from the 4% lows experienced in 2017. On the group level, we believe this should allow the firm to incrementally improve operating margins as it shifts toward higher-value activities while generating mid-single-digit top-line growth.
As the largest of only three truly globally diversified testing, inspection, and certification firms, SGS looks to us to be well placed to benefit from several structural trends in the industry, such as increased outsourcing, implementation of further regulation, and a tilt to higher-value activities by the main industry players. The shift towards global suppliers by multinational companies is also a large driver and one of the cited reasons for the strong growth in SGS’ consumer business over the last few years.
SGS is engaged in the provision of inspection, verification, testing, certification and quality assurance services. Co.'s business lines include: Agricultural; Minerals; Oil, Gas & Chemicals; Life Science; Consumer Testing; Systems & Services Certification; Industrial; Environmental; Automotive; and Governments & Institutions. As of Dec 31 2014, Co.'s geographic operations were organized as follows: Europe, Africa, Middle East (Western Europe, Northern and Central Europe, Southern Central Europe, Eastern Europe & Middle East, and Africa); Americas (North America, and South America); and Asia Pacific (East Asia, China & Hong Kong, and South Eastern Asia & Pacific).
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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