tic outlook 2018 - barclayscorporate.com · the next year will see multinational tic players expand...
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TIC outlook 2018Trends and prospects in the Testing, Inspection and Certification sector
Contents3 Executivesummary
4 2017:TICindustryresilience
6 2018outlook:trendstowatch
7 DigitalTIC
8 M&A:adividedfield
10 Keytakeaways
11 Abouttheauthors
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Executive summaryBuildingonstrongfoundations,theTesting,InspectionandCertificationsectorispoisedtocapitaliseonahostofpotentialgrowthopportunitiesin2018.
TheTICindustryenjoyssomekeyadvantages.Operatorsgenerallydeliverhighermarginsandrequirerelativelylowercapitalexpenditurethanotherbusinessservicessectors.Andfinancialperformanceistypicallyunderpinnedbyexcellentrevenuevisibility,duetolonger-termcontractsandframeworkagreements–supplementedbyregulation.
ThesesoundfundamentalsensuredtheTICsectorremainedstrongin2017.Infact,despitemuchpoliticaluncertainty,theentireTICindustryhasremainedresilientthroughtheeconomiccycle.
ItistruethatthepreviousthreeyearshadseenaslowingofCAGRsacrosstheindustry.In2017,however,thistrendbegantoreverse.Thatcoincidedwithastabilisationofleverageandanimprovementinliquidity–pointingtoapositiveoutlookfor2018(refertographonpage4).
M&Areturns
Thesector’smergerandacquisitionscenehadahealthy2017.Thekeyplayerscontinuedtosupportlowtomid-teenEV/EBITDAratios,providingopportunitiestodrivereturnsthroughM&A.Weexpectthatpicturetopersist.
Withnomaterialissuesresultingfromthelargerleveragedbuyouts,financingconfidenceishigh.Andasastill-fragmentedsectorabletoaugmentfinancialperformancewithstrategicacquisitions,theopportunityforreturnsoninvestmentremainsbuoyant.
Supportingsuccess
Inthisreportwereflectontheeventsofthepastyearinthesectorandhighlightthekeyfactorsweseeshapingitsdevelopmentin2018.Weconsidertheopportunitiesandthreatsposedbydigitaladvances,andwelookindetailatM&Aprospectsforthenextyear.
Thefirmsbestplacedforsuccesswillbethosewithscalableoperatingmodels,uniquemarketpositioningandadigitallyenabledgrowthagenda–allowingthemtodeliverfast-paced,integratedsolutionsfortheirclients.
WehavecontinuedtosupportTICinvestmentthroughout2017,andweremainexcitedaboutopportunitiestosupportourclients’growthambitions.
Source:CapitalIQ
TICsectortradingprofile:Marginanalysis
TICsectortradingprofile:CAGR%14%
12%
10%
8%
6%
4%
2%
0% 2014 2015 2016 2017
45%
40%
35%
30%
25%
20%
15%
10%
5%
0% 2013 2014 2015 2016 2017
GrossMargin% Red:EBITDAMargin%
EBITAMargin% Capexas%ofRevenues
TotalRevenue EBITDA GrossProfit EBITA
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MikeLeggoDirector&HeadofTICSectorBarclaysM:07500953351
MarkMaunsellAssociateDirectorClearwaterInternationalM:07718521201
2017: TIC industry resilienceTheTICsectorstayedoncoursethroughayearofpoliticalturmoilandsomechallengingeconomicconditions.
Thestateofthemarket
TheglobalTICmarketisvaluedataround€200bn.ItisexpectedtogrowataCAGRof5%between2017and2023,withvariationsbysector.1Inlightofthechallengesfacingthewidereconomy,thisrepresentsaverypositiveoutlook.
Themarketishighlyfragmented.Thelargestthreeplayers–SGS,BureauVeritasandIntertek–holdacombinedmarketshareoflessthan25%.Thetop10playersaccountforlessthan40%ofthemarket.
Inthelastdecade,thethreetopoperatorsmentionedabovehaveexpandedswiftlyintonewgeographiesandsectors,
becomingdiversifiedglobalmajors.Second-tiercompaniessuchasDekra,ALSandULhavealsogatheredscaleandinternationalpresencewhileremainingmoresector-focused.Thereisalongtailofregionalcompaniesoperatinginnichedisciplines.
Achallengingstart
2017startedwithfurtherdowngradesofoilandgasrelatedearningsandarelativelychallengingoutlook.Weakdemandandlowpricescontinuedtoaffecttheindustry.However,livingwithloweroilpricesandaweakermineralssectorwascertainlynothingnew,andtheindustryhaslargelyrecalibrateditself.
1Source:BureauVeritas2016AnnualReport.
Creditmetrics
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x 2013 2014 2015 2016 2017
Currentratio Totaldebt/EBITDA Netdebt/EBITDA
The top 10playersaccountforlessthan
40%ofthemarket
SGS, Bureau Veritas and Intertekholdacombinedmarketshareoflessthan
25%4of11
9%
6%
6%
15%
15%9%
36%
3%
Commodities
Consumer
Compliance
Environmental
In Asset Inspection and Certificate
Industry and Infrastructure
Life Science and Pharma
Marine
TheTICsectorwasinfluencedbyacomplexpoliticallandscape.TheTrumpelectionvictorysuggestedashifttowardsprotectionismintheUSandthegrowthofanti-regulationsentiment.Andonaglobalscale,therateofchangeandtheimpactofgovernmentpolicywasuncertain,withanydilutioninstandardsnaturallyhavinganimpactongrowthprospects.Despitealloftheseheadwinds,though,thesectorcontinuedtothriveandtheprospectsin2018andbeyondremaingood.
ThefogofBrexit
IntheUK,uncertaintyovertheEuropeansinglemarketandtheSingleStandardmodelcontinuedafterArticle50wastriggered.TheconsensuswasthatEuropeanandUKregulationwouldcontinuetoleadtheworld,buttheUK’srolehasthepotentialtovarysignificantlyacrosssectorverticals.
ThosefirmsdependentontheUKbeingthedefaultcentreforEuropeanoperationshadtotakeahardlookattheroadahead.Meanwhile,theunderlyinguncertaintyaboutpublicinfrastructurespendandcurrencyvolatilitywasalsohighontheagendasofTICboards.
Lookingthroughawiderlens,theBrexitvotehasundoubtedlycausedamoderateslowingoftheUKeconomy.Apatternofsubduedconsumptionandinvestmentactivityhasemergedamidhigherinflation.However,sterlingdepreciation,healthynetexportsandimprovedglobaltrademomentumhaveoffsettheimpact.Brexitscenarioswillofcoursehavedifferenteconomicconsequences.
TheslowprogressintheEU–UKnegotiationswillmeanfurtheruncertaintyin2018.Again,thisissomethingthesectorhasweatheredpreviously,andweseenoreasonwhyTICbusinesseswillnotcontinuetoperformwellintheshortandmediumterm.
Majordeals
2017continuedtobeactiveontheM&Afront.Inthesecondhalfoftheyear,thecompletionofElement/ExovawasfollowedbytheannouncementsofEurofins/EAG;Applusbackontheacquisitiontrail(bothEurofinsandApplusraisedequityonthebackoftheiracquisitions);DNVFoundationbuyingbackintheMarylandminority;andcontinuedsponsorauctionsforAsiainspectionandAtesteo,amongothers.
Therewashealthyprivateequityinvestmentinfirmsofallsizes,driveninpartbysomegenerallyfavourablefinancingmarketsandwillingbanksupportforTIC.
Giventhebroadlybenignmacroeconomicandfinancingbackdrop,itisreasonabletoexpecttheM&Asceneinthesectortoremainbusyin2018.
Source:CapitalIQ
M&Aacrosssectorverticals(2017)
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PE Seller
PE Buyer
PE to PE
Trade
Commodities
Consumer
Compliance
Environmental
In Asset Inspection and Certificate
Industry and Infrastructure
Life Science and Pharma
Marine
9%
82%
3%
6%
PE Seller
PE Buyer
PE to PE
Trade
9%
6%
6%
9%
82%
3%
6%
15%
15%9%
36%
3%
2018 outlook: trends to watchAriseinoutsourcingofTICfunctionsandever-tighteningregulationareamongthekeytrendsthatwillshapethesectorthisyear.
Outsourcing
Anestimated40%ofthemarketiscurrentlyoutsourced,withtheremainderofTICservicescarriedoutin-house.Theseservicesareoftennon-corebusinessforthecompany.Thepushtowardsoutsourcing–andinspecificinstances,theprivatisationofstate-ownedlaboratories–willcontinuetobeastrongdriverofgrowth.It’snotallone-waytrafficthough,andtheoutsourcedmodelcannotrelysolelyonitsthird-partyaccreditationcapabilityasjustificationforcontinuedgrowth.ThereareinstancesofTICservicesattributabletosomegovernmentagenciesmovingbackin-house,reflectingthepressureonpublicspending.
Regulation
Increasinglevelsofregulationhavetriggeredatransitionfromavoluntary-basedriskmanagementapproachtomandatorytestingservices–forexample,aftertherecenthigh-profilevehicleemissionsscandal.Additionally,thetragicGrenfellTowerfirehighlightedthecriticalneedforstandardsandcertificationintheconstructionandmaintenanceofpublicinfrastructure.AnevolvingregulatorylandscapeisanintrinsicpartoftheTICindustryandwillcontinuetogeneratenewopportunitiesforfirms–matchingtheirclients’needs.
Emergingmarketgrowth
ThenextyearwillseemultinationalTICplayersexpandfurtherintonewmarketsanddevelopingeconomies,chieflythroughacquisition,anddealwithnewcultural,taxandlegislativeregimes.Chinawillcontinuetobeaprimegrowthterritoryforthesector.
Globalisation
TICfirmscontinuetobecalledontoscrutiniseinternationalsupplychainsasaresultoftrendstowardslowersourcingandprocurementcosts.Thesourcingofrawmaterialsfromjurisdictionswithdifferentqualitycontrolprocedures,forinstance,willrequiremoreTICinput.Additionally–giventheproliferationoffirmsdeployingproductsonaglobalscale,oftensimultaneously,andinvolvingcomplexmanufacturingandsupplierarrangements–globalisationisamajorgrowthelementoftheTICindustry.
Brandprotection
Theriseinconsciousconsumerismwillcontinueonamajorscale,pilingpressureonbrandstoprotecttheirreputations.ThisismovingtheneedlefromTICservicesbeingseenasobligatory,tobeingabletoproviderealcompetitiveadvantage.Consumersexpectmorechoice,lowerpricesandbetterquality–hence,thetrustprovidedbycertificationisincreasinglyimportant.TheproliferationofsocialmedianetworksandthespeedofinformationsharingwilldrivefurthergrowthintheTICsector.Generalincreasesinglobalwealthwillhavethesameeffect,throughraisedexpectationsofsafetyandquality.
Protectionism
Therecentriseofprotectionistpolicyandtradebarriershasbeenoneofthe‘handbrakes’onthesoaringgrowthtrajectoriespreviouslyseeninTIC.Iffollowedthrough,thistrendhasthepotentialtolimitglobaltradegrowth,withanaturaldampeningeffectonthesector.However,weremainconfidentthattheresilienceandstrengthinherentintheindustrywillcompensateforthechallengesfaced.
Costsavings
Boardswillbelookingtoachievefurtherefficienciesinstaffing,procurementandgeneraloperatingmodels,tosaveoncostsandgrowmargins.TIChasanincreasinglyimportantroleinhelpingallindustriesachievethesecosttargets.
40%
60%
An estimated
of the market is currently outsourced.
of TIC services are carried
out in house.
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P/E EV/EBITDA EV/EBITA
2017E 2018E 2017E 2018E 2017E 2018E
Applus 17.5x 15.5x 11.3x 10.1x 15.0x 13.1x
Bureau Veritas 24.5x 23.2x 14.5x 13.4x 16.5x 15.8x
Intertek 27.5x 25.9x 16.6x 15.4x 20.2x 18.8x
SGS 26.8x 23.9x 15.1x 13.7x 19.8x 18.0x
W. Average 26.5x 24.2x 15.2x 14.0x 19.2x 17.1x
Digital TICFromdronestoBigData,recentadvancesarebeingembracedbyTICcompanieskeentooffernewcapabilitiestotheirclients.
2017sawfurtherleapsinthedigitisationoftheindustry.Digitalinspection,predictivemaintenanceandintegratedsensorsarereplacingphysicalinspection.Theseadvancesprovidegrowthopportunitiesandhelpoperatorstoraisemargins,enternewmarketsandembedclientrelationships.
InspectionServicesisagoodexample.Traditionallyverylabour-intensive,theserviceisnowbeingtransformedbytheuseoftechnologysuchasdronestohelpwithcropmanagementandassetintegrity.
Someintheindustryfearthesedevelopmentsmayalsoleadtodisintermediationandadditionalcompetition.However,therequirementforhumantechnicalexpertisetointerpretandusedatawillalwaysmakeitdifficulttofullyautomatetheprocess.
Investinginthefuture
Manyfirmsarestillassessingtheirinvestmentstrategiestocapitaliseontheemergingtechnologicalopportunities.Intertek,forexample,hassaidthat“superiortechnology,increasingproductivityandgivingaddedvaluetocustomers”arethekeyenablersforitsgrowthstrategy.2
Leadingplayersareintroducingarangeofinitiativesinabidtoenhanceproductivityandcustomerexperience.Ratherthandevelopingproprietarysoftware,theyoftenpursuestrategicpartnershipswithspecialisttechnologyproviders.BureauVeritas,oneofthemostactiveinthisarea,hasongoinginitiativesinvolvinganalytics,simulationandworkflow.
Source:CapitalIQ
Harnessingthepotential
Newdevelopmentsinautomation,roboticsandartificialintelligenceareaffectingtheentirebusinessservicesindustry.TICisnoexception.
TICplayerswhocanharnessBigDataanddigitalprocessingimprovementstopulldatafrommanydisparatesources,withouttheintegrationchallengesofthepast,arebestplacedtoofferapremiumservice.OwnershipandprotectionofdataisagrowingthemeandcouldbeanopportunityorthreatasTICdigitisationgainsmomentum.Newtechnologyisalsoimprovinganalyticalmethodsandloweringdetectionlimits.
AlltheseadvancesarehelpingTICcompanieskeeppacewithgrowingdemandsforbetterreportingandanalyticstechniques,andgreateraccuracy.
Tradingmultiples
2IntertekAnnualReport2016.
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M&A: a divided fieldWhilethebiggestplayersarescalingbacktheiracquisitions,thehealthyappetiteofsecond-tierfirmsisdrivinganactiveM&Ascene.
KeyplayershaveallpledgedsignificantfundingforM&Aandannouncedambitiousshort-termtargets.Forexample,SGScompleted12transactionsin2017,movingitclosertoitsstrategicplanofacquiringrevenuesofCHF1bn(c.€867m)by2020.AndRINAislookingtospendaround€200maheadofanIPOinthenextthreeyears.
M&Ahas,however,becomemorechallenging.Thelargestlistedcompaniesaremainlyfocusingonsmalltuck-indeals.Thispartlyreflectsthelackofsizeabletargetsinafragmentedsector,butalsothepremiumpriceoflarge-scaletransactions,whichofferlessscopeforvaluecreation.Inaddition,somehigh-profileacquisitions–suchasBureauVeritas’spurchaseofMaxximatthetopoftheoilandgasmarket(10.7xEV/EBITDA)–haveunderperformed.
Meanwhile,however,second-tierandprivateequity-backedbusinessesarestillhighlyacquisitive.Thesecompaniesareoftenbetterplacedtojustifythepriceoflargerdeals,throughexpansionoftheirgeographicalandsectorreach.AgoodexampleisNetherlands-basedACTAHoldingBV’spurchaseofHelsinki-headquarteredInspectaGroupOyfor€200m(14.0xEV/EBITDA).
ThepowerofPE
Privateequitygroupsareresponsibleformanynotabletransactions.Inthelasttwoyears,high-profiledealshaveincludedPSPandPartnersGroup’sinvestmentinCerba(12.0xEV/EBITDA),Apax’sbuyoutoftheremainingstakeinUnilabs(11.8xEV/EBITDA)andBPAE’spublictoprivatepurchaseofSAIGlobal(9.4xEV/EBITDA).
Privateequitygroupsareincreasinglyopentolookingatsmallerplatforms,providedtheyhelpbuildsectorleadershipwithastrategicgeographicfootprint.Inflexion’srecentinvestmentinCawoodScientific,aspecialistinthefood,environmentalandveterinarysegments,isanexampleofinvestors’appetitetoacquirenicheoperators.
Akeyattractionofthesectoristhepotentialformultipleexitoptions.Inthemainthiscomesintheformofasaletoalargerprivateequityfundorawell-capitalisedtradepurchaser.Thiswasthecasewith3i’sdisposalofESGtoSOCOTEC,andUS-basedInclineEquityPartners’recentdisinvestmentofAmSpecHoldingCorp,apetroleumspecialist,toOlympusPartners(12.0xEV/EBITDA).
Insomesituations,anIPOisacrediblealternative.However,thepost-floatperformanceofExova(IPO’d12.0xEV/EBITDA,takenprivateat9.4x)andApplusraisesquestionsovertheoperationalgearingwhileacompanyislistedonthepublicmarkets.
Privateequity-backedtradeplatformswillcontinuetobeakeysourceofdealsinthenexttwoyears.Theinvestmentby3iandCITICCapitalinGermany-basedFormalD,aspecialistTICprovidertotheautomotivesector,isaprimeexample.ThebusinesswilllooktobuildpresenceintheUSandAsiaandtoreduceitsrelianceonEurope,whichstillrepresents75%ofrevenues.Other2017examplesincludeLLCP’splatformFlexXray,andSpectrumEquity’spurchaseofIreland-basedTheDigitalMarketingInstitute.
Privateequitygroupsareincreasinglyopentolookingatsmallerplatforms,providedtheyhelpbuildsectorleadershipwithastrategicgeographicfootprint.
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Towardsconvergence
Thelastfewyearshaveseenincreasingconvergenceasinstrumentationandcontrolsmanufacturershavelookedtoaugmentproductsandaccessfaster-growing,higher-marginactivitiesbybuyingservicesbusinesses.
OneofthebestexamplesisSpectrisplc,whichbuiltonitsacquisitionofMillbrookGroup(12.0–13.0xEV/EBITDA)in2016throughthepurchaseofConceptLifeSciencesinJanuary2018for£163m(c.€185m).ThedealisseenashighlycomplementarytotheactivitiesofMalvernPanalytical,whichformspartofSpectris’stestandmeasurementdivision.OtherexamplesincludeHoriba–whichpurchasedMiraLtd(14.0xEV/EBITDA)–aswellasDanaherandITWInc.
Globalgrowthpaths
Emergingmarkets,especiallyChina,presentsignificantopportunitiesforM&A.Theseterritorieshavebecomeattractivethroughthedevelopmentofindigenousindustriesandsubsequentaccelerationinexports,theintroductionofstringentstandardsandrapidurbanisation.
Inaddition,theriseofthemiddleclasshasledtoanincreaseinprivateconsumptionandademandforbothsafetyandproductquality.Thisinturnoffersgrowthopportunitiesinareassuchasfoodandconsumergoodstesting.AprimeexampleistheacquisitionofTÜVRheinland’sfoodanalysislaboratoriesinChinaandTaiwanbyGermany-basedTentamusGroup.
OverlappingM&Astrategiesamongseveraloftheglobalconsolidatorsarelikelytoinfluencepricinginthecomingyear.VirtuallyalloftheEuropeheadquarteredTICplayersarestillsubscaleintheUSrelativetoglobalfootprint,andarealsokeentobuildpresenceinthefast-growingChinesemarket.Food,consumer,agricultureandautomotivemarketswillbeparticularlyattractive.
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Key takeaways
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• TheTICsectoriswellplacedtodisplaycontinuedresilienceandgrowthinthefaceofpoliticalandeconomicuncertaintyin2018
• CapitalexpenditureissettoincreasefurtherasTICplayerstakeadvantageofthepotentialofnewtechnologiestotransformthesector,oftenbyforgingpartnershipswithspecialistproviders
• Otherfactorstriggeringgrowthin2018includefurtheroutsourcingofTICfunctionsbyindustry,tighteningregulationinmanyfieldsandagrowingneedtoensurebrandprotection
• MultinationalTICoperatorsaresettoexpandfurtherintodevelopingeconomies,chieflythroughnewacquisitions,withChinaaprimetarget
• Second-tierplayersarelikelytobemoreacquisitivethanthebiggestbusinesses,whicharenowfindingitmorechallengingtocreatevaluefromnewtransactions
• Privateequity-backedplatformswillcontinuetobeaprimesourceofnewdealsoverthenexttwoyears
• Withconstructionoutputearmarkedtobebroadlyflatin2018andinthewakeoftheCarillionliquidation,TICvolumeswillbeimpacted.
About the authorsMikeLeggoDirector&HeadofTICSectorBarclays
MikeLeggoisHeadofTICatBarclaysCorporate,wherehesupportsthegrowthstrategiesofclientsinthesectorviastructuredfinancingsolutionsandglobaltreasurysupport.Hehas10yearsofexperiencecoveringtheBusinessServicessectorandhascompletedanumberofkeysectortransactionsinvolvingbothpublicandprivatecompanies.InMike’sroleasakeyClientCoverageBankeratBarclaysheworkswithmanagementteamslookingtoraisecapitalviaBankandCapitalMarkets.HeiscommittedtotheTICsectorandutilisesindustryexpertiseandafocusonlong-termrelationshipstodriveresults.
M:07500953351*[email protected]
MarkMaunsellAssociateDirectorBusinessServicesMarketIntelligenceClearwaterInternational
MarkisanAssociateDirectoratClearwaterInternational,amarketleadingindependentcorporatefinancehousespecialisinginmergersandacquisitions,managementbuyoutsandfundraisingtransactions.HehasworkedinM&Aforovereightyearsandhasbeeninvolvedinanumberofdealsinvolvingprivateequity,owner-managedbusinessesandcorporates.
M:07718521201*[email protected]
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March2018.BD06975-01.
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