March 6, 2014 5:03 pm

Bureau Veritas: testing times

The route to growth needs a little checking of its own

Testing times should be the best of times for Bureau Veritas. Inspecting and certifying products that other people make ought to do well as the global economy starts to pick up. And after a tough 2013 things are looking brighter. On Thursday the company confirmed it planned to increase sales 9-12 per cent this year and next – and revealed higher operating margins for 2013. Cue a 7 per cent relief rally as investor fears about the slowdown in the mining and energy divisions did not materialise in overall profitability.

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But the route to growth needs a little testing of its own. About a third of it is expected to come from acquisitions. The testing, inspection and certification (TIC) industry is fragmented, and the bigger players such as Bureau Veritas, with just 5 per cent of the global market, aim to consolidate.

A combination of healthy profitability (return on equity at 35 per cent) and reliable free cash flow averaging more than €300m the past two years has emboldened management to fund growth partly with debt. Net debt is now high at 135 per cent of equity, although at about 1.7 times earnings before interest, taxes, depreciation and amortisation there is little danger of the company breaching its debt covenants (set at 3.5 times).

The TIC industry should benefit as world trade recovers. Moreover, investors hope that global manufacturers will upgrade ageing fixed assets; good for the TIC industry.

However, at 20 times forward earnings Bureau Veritas is not cheap. Since 2006 it has averaged about 17, and over the period it has rarely climbed much above 20. Competitors SGS and Intertek look similarly pricey. Promised growth seems priced in. To justify a higher valuation the company should prove that the TIC business has structural, as well as cyclical, growth ahead.

Email the Lex team in confidence at lex@ft.com

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