Intertek
Equity Market Cap (M) £7,325
Industrials
Denis Moreau, VP Investor Relations
Intertek is a global provider of quality, reputation and safety assurance, and operates in 30 countries.
Our meeting focussed on its Consumer Products testing division, formed in the 1970s as a pioneer of the testing market. The firm claims a #1 market share of the Consumer Products testing market, aligned with a strong reputation.
The division expanded through mergers and acquisitions, with a focus on electricals. Testing is initiated before manufacturing starts as manufacturers need to know that their products are safe and compliant before investing in large-scale manufacture.
Softlines testing (including fashion and footwear) comprises 25% of divisional revenue. Hardlines is also a quarter of revenue and tests things like toys and furniture. If you are going to make a doll, you want to make sure that small children can't chew off a button and choke and that the colouring chemicals in the doll’s clothes are not poisonous. Denis said Intertek has a strong market position in hardline testing, with a tilt towards Asia.
Electricals are 50% of the division – including testing of medical devices, lighting, AC units, building heating systems and batteries. Regulations are strict for obvious fire prevention reasons. The division has grown by 7% growth per annum over the last decade and enjoys a strong 30% margin. The firm guide cautiously for 5% annual growth going forward.
Intertek’s pricing model is robust. If a Chinese shirt manufacturer wants to sell shirts to a UK retailer, that retailer will direct the manufacturer to Intertek, which has to pay the price quoted.
During Covid, Intertek kept its well-paid seasoned professional testers and lab technicians. The risks to Intertek are that in the event of another global downturn, volumes would weaken and the employee remuneration cost base would drive a sharp fall in profitability.
L’Oreal
Equity Market Cap (M) €212,162
Consumer staples
Eva Quiroga, Head of Investor Relations
L’Oreal is the world’s largest beauty company, with its portfolio of 38 brands holding a combined market share of c.26% thanks to a strong track record of outperforming the growth of the global beauty market. Of late, however, the degree of outperformance has waned, with Eva attributing this to exposure mix relative to the market, with L’Oreal overexposed to the current softer parts of the market which include travel, retail and China.
Buying brands through mergers and acquisitions has been a key part of L’Oreal’s success, with 36 out of 38 brands having been acquired, including Garnier and CeraVe. Recently however, we have seen L’Oreal buy stakes in businesses such as Galderma, rather than outright purchases. Eva said this was primarily due to availability and to provide optionality on newly emerging trends, as in the case of Galderma in cosmetic procedures.
The rise of platforms such as TikTok has lowered barriers to entry to the beauty market for ‘dupes’ (cheaper imitations) and indie brands. Whilst it has become easier to develop and market start-ups into small and medium sized brands using such platforms, Eva highlighted the significant scale advantage L’Oreal holds over such rivals, for example in absolute marketing and research and development budgets. Allocating an extra 0.5% of sales to marketing would provide L’Oreal €217m more budget, but for a business with just €50m in sales this would be only €250,000 of extra budget. Moreover, scaling smaller brands across product categories and geographies is very difficult without significant capital resource, and as a result many smaller brands struggle to break through c.$100m valuations.
Procter & Gamble
Equity Market Cap (M) $367,550
Consumer Staples
Naomi Sayles, Director, Investor Relationst
Consumer staples products are generally characterised by low switching costs and a broad array of equitable substitutes. Despite this, Procter & Gamble (P&G) has a robust track record of generating contributions to growth through price, mix and volume. Innovation, Naomi said, is the cornerstone of this record, in a world where product performance drives purchasing by the consumer. At the heart of P&G’s innovation approach is its ‘5-vector superiority strategy’, which compares P&G products against substitutes in terms of product quality, packaging, brand communication, retail execution and customer and consumer value. Where superiority is achieved in 4 out of 5 vectors, a product has good runway for consistent growth via both price and volume. To execute such a strategy, it was important to first have a strong portfolio of brands in product categories suitable for innovation. This streamlined approach has seen product category exposure halve to just 10 and portfolio brands fall from c.150 to c.66 daily-use, non- food brands since 2014.
Like many staples companies P&G has tried to emulate its developed market position in the arena of emerging markets, which are referred to as ‘enterprise’ markets at P&G. The degree of success in these forays has been mixed, with P&G recently scaling back operations in both Nigeria and Argentina. Naomi outlined that when evaluating new enterprise markets in the future that it would be on a ‘right to win’ basis, with more analysis conducted on product/brand suitability, consumer demand trends and macroeconomic factors such as forex volatility. The primary focus and priority for P&G, however, will be to increase consumption per capita in existing markets.
CONSUMER DISCRETIONARYBooking Holdings
Burlington
Technogym
TJX
CONSUMER STAPLESCoca Cola
Diageo
L'Oreal
Mondelez
Procter & Gamble
ENERGYTotalEnergies
HEALTH CAREThermo Fisher
GSK
INDUSTRIALSDiploma
IMI
Intertek
Spirax
WW Grainger
INFORMATION TECHNOLOGYHalma
MATERIALSRio Tinto
REAL ESTATESegro
Sir John Royden, Head of Research
Jack Summers, Assistant Research Analyst
