Morningstar | SGSN Updated Forecasts and Estimates from 09 Aug 2018
Market leader SGS released a solid set of first-half results, in line with our expectations for the full year. Organic revenue growth topped 5.6% over the period, a level not seen on a full-year basis since 2012. However, we don't expect to make any material changes to our forecasts on the back of these results, and we maintain our CHF 2,170 fair value estimate and narrow moat mating. We believe the shares are currently overvalued.The strong level of organic growth within the business was driven primarily by a pickup in divisions that had seen a significant negative impact from weakened commodity prices over the past few years. The minerals business, in particular, saw organic revenue growth of almost 14%, with areas such as metallurgical testing seeing large spikes in growth over the period, as projects that had previously been on the cusp of being commercially viable have suddenly hit their break-even points. Similarly, in oil, gas, and chemicals, a supportive oil price has boosted growth in downstream activity, helping the division increase revenue by 7.7% organically over the period. SGS’ agriculture business, its main point of differentiation versus peers, saw slightly disappointing organic growth of just 2.7%, although this was down to short-term external issues for the most part. In the longer term, we believe this business should be able to grow at around 6%, owing to structural growth elements within the division.
While we are pleased to have reached a potential inflection point in commodity-exposed businesses, we are also mindful of the potential for further volatility in these areas as commodity prices oscillate. We forecast top-line growth increasing linearly from here, from 3.9% in 2018 to 5.5% by 2022, with operating margins increasing by around 2.5% to 16.6%, bringing us to our CHF 2,170 fair value estimate. Given the current share price of CHF 2,550, we believe the market is discounting unrealistic terminal growth assumptions.
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.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.