RBC upgrades SGS to “sector perform” on ATS deal and earnings upside

Investing.com -- RBC Capital Markets has upgraded SGS SA (SIX:SGSN) to “sector perform” from “underperform", citing improved earnings prospects following its planned acquisition of ATS, in a note dated Tuesday. 

The upgrade reflects a more favorable earnings outlook, supported by revised forecasts and a detailed valuation reset.

The upgrade incorporates the expected consolidation of ATS from January 1, 2026. The deal is projected to lift SGS’s adjusted diluted EPS by 4% in 2026 and 5% in 2027. 

While the acquisition is initially dilutive to return on invested capital (ROIC), its funding, less than CHF100 million of the CHF1.33 billion enterprise value to be paid in shares, helps minimize dilution risks.

SGS is expected to finance the transaction largely through low-cost debt, having recently issued CHF600 million in bonds maturing in 8.5 years with a 1.22% coupon. The transaction is expected to be accretive to earnings from year one.

RBC raised its price target on SGS to CHF86.50 drom CHF76, implying an 8% upside from the July 4 closing price of CHF83.10. 

The new target includes CHF11 per share in anticipated value from bolt-on M&A activity, representing 13% of the total valuation.

The revised valuation uses a discounted cash flow model with a weighted average cost of capital (WACC) of 7.75%, medium-term revenue growth of 5%, and a 16% terminal EBIT margin. 

RBC notes that investors appear focused on near-term earnings accretion, despite some short-term ROIC dilution.

Updated projections show 2026 revenue at CHF7.66 billion, with adjusted diluted EPS of CHF4.21, up from CHF3.81 in 2025. 

By 2027, revenue is forecast at CHF8.09 billion and EPS at CHF4.57. Dividends are expected to rise gradually to CHF3.36 per share in 2027.

RBC sees SGS’s fundamentals supported by stable demand in the Testing, Inspection, and Certification (TIC) market, but flags risks from macroeconomic uncertainty, geopolitical instability, and exposure to legacy segments like fast fashion and ICE vehicles.

In a bull case scenario, the stock could rise to CHF115 with stronger growth, margin expansion, and greater M&A value realization. The downside case targets CHF61 if revenue growth slows and margins compress.