RBC slashes SGS price target to CHF 85, issues “underperform” rating

Investing.com -- SGS SA was downgraded to “underperform” from “sector perform” by RBC Capital Markets, with the price target cut to CHF 85 from CHF 86.50, in a note dated Monday.

RBC said the downgrade reflects growing headwinds tied to weakening global trade and a softer outlook for organic growth. 

The brokerage cited sharply reduced world merchandise trade forecasts from the WTO for 2026 and weak new export order readings in recent Global PMI data, which it called a reliable lead indicator for global trade. 

RBC lowered its FY26 organic revenue growth estimate as a result, stating it now sits about 130 basis points below consensus.

The brokerage also said momentum from sustainability-driven demand is weakening as the economic effects of related initiatives become more visible, including accelerated de-industrialisation in Europe and inflationary pressures. 

RBC said that some related regulations and targets are being softened or abandoned and expects de-prioritisation of ESG to weigh further on testing, inspection and certification services.

RBC pointed to what it described as underwhelming long-term real growth, noting that SGS’ 10-year compound annual growth rate in adjusted EBITA has been 3% in euro terms. 

The brokerage said the stock has lagged the Stoxx Europe 600 over both three-year and 10-year periods and expects that trend to continue in FY26.

The analysts said the prospect of a third consecutive year of earnings-dilutive scrip dividends adds pressure. SGS held its dividend per share flat since 2019 and offered scrips for FY23 and FY24 with an average 64% take-up. 

RBC said that with an expected dividend cover of 1.2x, another scrip in FY25 could dilute EPS by about 2% or approximately 4.3 million shares.

RBC cut its price target by 2% and said that while the implied total shareholder return downside is limited, the downgrade reflects stronger opportunities elsewhere in the Business Services sector.

The brokerage’s core price target assumptions include a 7.5% WACC, 4.5% medium-term revenue growth and a 15.9% terminal margin. The base case valuation includes about CHF 12 per share for future bolt-on M&A.

SGS shares outstanding are 189 million, with a dividend of CHF 3.20 and a market capitalization of CHF 17.4 billion.