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On Wednesday, Citi analyst Arthur Truslove reinstated coverage on SGS SA (SIX:SGSN:SW) (OTC: SGSOY), issuing a Buy rating and setting a price target of CHF105.00. The analyst highlighted the company’s potential for margin improvement, citing cost savings and operational leverage in specific divisions as key drivers. According to InvestingPro data, SGS currently commands a market capitalization of $18.2 billion and trades at a P/E ratio of 30x, reflecting market expectations for future growth.
SGS SA, a leading inspection, verification, testing, and certification company, is expected to benefit from approximately CHF150 million in cost savings. These savings are anticipated to contribute to an increase in the company’s adjusted EBIT margin from the 2023 base of 14.7%. Truslove’s model predicts a margin of 16.8% by 2026, which is higher than the Visible Alpha consensus™ adjusted EBIT margin forecast of 16.15% for the same year. InvestingPro analysis shows the company maintains strong operational efficiency with a current gross profit margin of 43.6% and generates healthy free cash flow.
The analyst’s optimism extends to SGS’s adjusted Profit Before Tax (PBT) for 2026, which is projected to reach CHF1,231 million. This figure is approximately 6% above the consensus estimates. Truslove’s analysis suggests that the market has not fully appreciated the margin expansion opportunities available to SGS, particularly in the Health and Nutrition and Connectivity and Products divisions.
SGS’s stock is considered to be at an attractive entry point, as noted by Truslove. For the first time in about seven months, the company’s shares are not trading above their five-year average premium to the European Testing, Inspection, and Certification (TIC) sector. The valuation metrics used for this comparison are Bloomberg consensus EV/adjusted EBIT and 12-month forward P/E.
Investors may find this renewed coverage and positive outlook a point of interest as SGS SA continues to navigate the TIC sector landscape. With the company’s strategic initiatives aimed at cost savings and operational efficiency, the analyst’s projections indicate potential for stock performance growth over the coming years.
In other recent news, SGS SA, a company with an $18.5 billion market cap, has ceased merger discussions with Bureau Veritas SA. Barclays (LON:BARC), maintaining its Underweight rating on SGS stock with a CHF78.00 target, has cited the complexities and potential challenges of the merger as a contributing factor. Both SGS and Bureau Veritas have reaffirmed their commitment to their respective mid-to-long-term strategies, with SGS focusing on "Strategy 27" and Bureau Veritas on "LEAP."
The end of these merger discussions has resulted in a significant market response. However, despite the market’s reaction, neither SGS nor Bureau Veritas has seen their share prices return to the levels prior to the merger speculation. Barclays continues to hold an Overweight rating on Bureau Veritas, indicating a 24% potential upside from the current price due to the company’s strong growth momentum, potential for upgrades, and low leverage compared to peers.
SGS, on the other hand, has been identified as having increased execution risk and high leverage relative to its peers, contributing to Barclays’ Underweight rating. SGS has demonstrated financial stability by maintaining dividend payments for 25 consecutive years. For investors seeking more detailed insights into SGS’s financial metrics, InvestingPro offers comprehensive analysis, particularly valuable as SGS’s earnings are scheduled for release on February 11, 2025.
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