SGS Earnings: Laying Down a Marker in 2023

Testing giant SGS SGSN put in a strong first-half performance. Organic revenue was up more than 8%, with management now guiding to a full-year result somewhere around this mark, alongside improved operating margins year over year. Despite the global economic uncertainty, we believe the tailwinds supporting the testing, inspection, and certification industry could well last into 2024. We see reasonable upside opportunity to our CHF 90 fair value estimate.

We often talk up the advantages of the diversified TIC model, and one clear benefit that has shone through in these results, is the boost that often comes to performance from the unlikeliest of sources. Despite volatility in commodity markets, SGS’ natural resources business was the standout performer in the group, delivering organic revenue growth of more than 10%, with operating margins rising 150 basis points to more than 14%. This was supported by high demand for testing of critical battery metals, as the proliferation of electric vehicles continues.

After the supply chain disruption we witnessed during the pandemic, global firms have been scrambling to diversify their supply chains, sourcing products and materials from multiple regions in order to reduce the risk of future disruption. SGS has been a clear beneficiary of this, reporting double-digit growth in supply chain audits in the first half of the year. We view this trend as structural, and believe global TIC firms like SGS are well positioned to capitalise on this over the coming years.