Vehicle inspection is actually a niche area under the ITC (Inspection, Testing and Certification) industry which offers its services to a very wide variety of products ranging from food to buildings, from marine to aerospace.
The main purpose of this post is to let readers understand the functionality and fundamental of the ITC industry. This will be more of an informative post and most of the information is gathered from the following sources:
Deutsche Bank's Investor Day report of SGS
NZB's FY10 report of SGS
Bureau Veritas Investor Relation Presentation
TUV SUD Annual Report 2010
AL Tech
Before I start, I will like to warn reader to exercise some discretion in discerning between facts and opinions as 2 of the sources are analyst's report while 2 of them are company's annual report. Stuffs like market structure and past information counts as fact while things like valuation are more of an opinion. I have also highlighted important points in bold.
About the business
From Deutsche Bank Report
“Inspection Services: SGS inspects and verifies the quantity, weight and quality of traded goods. Inspection takes place prior to shipment at the manufacturer’s or supplier’s premises.
Testing Services: These services test product quality and performance against various health, safety and regulatory standards. It is done by SGS in state-of-the-art laboratories close to the customer’s premises.
Certification Services: SGS certifies whether products, systems or services meet the requirements of standards set by governments, standardization bodies (e.g. ISO 9000) or by SGS customers. SGS also develops and certifies its own standards.”
Market Structure
Fig 1 Market Structure from Bureau Veritas
From NZB Report
Competitive landscape
“The global testing, inspection and certification remains a highly fragmented market, with less than 20% of market value estimated to be outsourced to independent companies such as SGS. SGS, Bureau Veritas, Dekra, TUV, DNV and Intertek account as the six largest players in the industry though their combined share do not exceed 15%. SGS share does not exceed 5%.”
From Deutsche Bank Report
“We estimate the global testing, inspection, and certification (TIC) industry serves a c.EUR60bn market. Out of this market c.30-35% is served by specialized and independent agencies such as SGS, Bureau Veritas and Intertek while the rest is not yet outsourced.
The industry covers all sectors (primary, secondary and tertiary), companies of various scales of operation (from small to large), and all regions. A large portfolio of services is offered, ranging from very basic (commodities quantity control) to tailored and sophisticated services(tests in laboratories, critical products / building conformity assessment). The market is still highly fragmented with only a few global players operating in multiple sectors (SGS, BV and Intertek) while the rest of the market (DNV, Dekra, TüV Süd and others) comprises mid-size organizations that often focus only on one region or on a limited number of sectors and areas of expertise. However, the industry is in a consolidation phase with large players like SGS focused on adding to their capabilities and increasing their local presence.”
Business’s Fundamental and Barrier to Entry
From TUV SUD Annual Report
“The key growth driver – not only in the CERTIFICATION strategic business segment, but also within the entire TÜV SÜD Group – is our service offering relating to the market readiness of manufacturers’ products, from development to marketing through to recycling. Here, we expect above-average growth rates in photovoltaic and in the inspection of textiles and leather goods. Overall, double-digit revenue growth is expected in ASIA PACIFIC.”
“In the ASIA PACIFIC region, revenue growth is primarily generated in the CERTIFICATION strategic business segment. However, the INDUSTRY and MOBILITY strategic business segments will increase their contribution to revenue in this region in the medium term. We see high potential for growth in the ASIA PACIFIC region, particularly in the area of environmental and energy technology.”
“In the CERTIFICATION strategic business segment, our business development in the ASIA PACIFIC region continued to be impacted by risks arising in Singapore due to higher administrative burdens, new certifications, and competition from the public sector. Furthermore, we are facing new risks in the region due to falling student numbers at the PSB Academy, tougher legislation in the field of education, and the new EduTrust certification scheme.”
From NZB Report
“Growth
VTIC industry has experienced CAGR of between 5-6% over the past 20 years, nearly 10% on average in the past 10. The industry has tended to decouple from traditional macro indicators such as GDP or World Trade volume growth, though a minor cyclical dimension is still conserved (some 35% of sector growth). Resilience of VTIC activities is on the account of the structural drivers behind sector growth combined with the upstream expansion of testing services in the product value chain, resulting in a lower dependence from final demand.”
“The industry is characterized by high barriers to entry, due to the need of an international network, extensive know-how and expertise as well as the need of accreditation from government bodies.”
From Deutsche Bank Report
“General overview
SGS’s customer base is relatively fragmented, i.e. the group’s top 100 clients together account for less than 15% of group sales. The contract scope is wide, ranging from basic quantity checks to very sophisticated tailor-made services involving laboratory testing.
Revenue patterns are quite predictable since a big portion is generated from recurring contracts. Customer loyalty is high as it can be expensive and time consuming to change from one provider to another. Furthermore, many services are specialized and only delivered by certain certification companies. Acquiring and processing the first certification cycle is costlier than subsequent recurring testing and certification processes.”
“Growth drivers
We believe globalization results in increased global trade flows, which are a major driver of growth for SGS, generating among other things the desire to trace the origin of goods.
Furthermore, we believe that protectionism, rather than freight forwarding companies, should be a growth driver for the sector. We believe that standards and testing are “great weapons” to be utilized by countries to avoid imports.”
Fig 2 Resilience to downturn from Bureau Veritas
Valuation
Fig 3 Deutsche Bank report on SGS's valuation
Fig 4 NZB Bank's report on VTIC peer group valuation
Cash Flow Generation
Fig 6 Deutsche Bank's FCF analysis of SGSHere's for a better understanding of 2 of the many segments in ITC industry
Civil Engineering
Fig 7 AL Tech's brochureIndustry Service
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