Morningstar | SGS 1H Results are Decent Upon Inspection
Narrow-moat SGS proffered up a reasonable set of first-half results, with organic revenue growth of 3.5% and operating margins up 20 basis points to 14.6%, in line with consensus, albeit slightly below our expectations. We do not expect to make any material changes to our group forecasts at this early point in the year however, nor to our CHF 2,340 fair value estimate. We believe the shares are currently fairly valued.Performance was mixed across the divisions. Consumer and retail, and industrial services were strong, with organic revenue growth of 5.5% and 4.9% respectively, and operating margins improving in the latter as a result of increased volume and a shift to higher value services. The certification business' performance against tough comps, with 2018 being a transition year for standards. Both transportation, and government and institutions saw organic revenue declines of 4.5% accompanied by marked operating margin reductions in the latter. While both of these businesses can be lumpy, management did highlight market pressure in some areas of the transport business.
As the largest of only three truly globally diversified TIC firms, we believe SGS is 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 toward 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.
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