Berenberg upgrades SGS to "buy" on restructuring progress and margin expansion

Investing.com -- SGS SA (SIX:SGSN) has been upgraded to "buy" from "hold" by Berenberg, citing operational restructuring, accelerated acquisitions, and improved financial metrics as justification. 

The shift follows the arrival of CEO Géraldine Picaud and CFO Marta Vlatchkova in early 2024, who have initiated a broad overhaul of the business.

SGS has guided for 5-7% annual organic growth and at least a 150bps adjusted EBITA margin improvement between FY2023 and FY2027. 

Berenberg forecasts 170bps improvement, exceeding guidance. The margin is projected to rise from 14.7% in FY2023 to 16.3% by FY2027. 

Adjusted EPS is expected to grow from CHF3.85 in FY2025 to CHF4.59 in FY2027, representing a 9% CAGR. 

Free cash flow is forecast to total CHF4.5bn over FY2024–FY2028, with CHF1.1bn available for acquisitions after dividends and the ATS deal.

SGS has pursued 20 acquisitions since March 2024, significantly exceeding its historical pace. 

The July 2025 acquisition of Applied Technical Services (ATS) for USD1.39bn is expected to add 3.7% to EPS in year one. 

The deal moves North American revenue closer to the CHF1.4bn 2027 target, up from CHF720m in 2024. 

However, the ATS acquisition reduces estimated ROIC from 11.8% in FY2024 to 9.5% in FY2025, though Berenberg considers this acceptable due to long-term growth potential.

The company’s low cyclical exposure, about 20% of revenue, is another factor supporting stable growth. 

SGS’s revenue mix is diversified across industries, with limited exposure to oil and gas, minerals, and agriculture. 

In contrast, segments such as environmental testing, food safety, and pharmaceuticals are expected to grow steadily, aided by regulatory demand.

The restructuring includes a CHF150m efficiency program (CHF100m from lean operations, CHF50 million procurement savings), and a move of headquarters from Geneva to Zug, generating CHF80 million in H1 2025. 

Cash conversion has improved from 42% in FY2023 to 51% in FY2024. Scrip dividends introduced in 2023 and 2024 had take-up rates of 64.9% and 63.3%, saving CHF765m in cash outflows and partially funding M&A.

Valuation remains attractive. SGS trades at 19.9x FY2026 P/E, a 14% discount to its long-term average and 16% below Berenberg’s target multiple of 23.4x.