The rules benefit the certification industry
European societies inspection and certification expect to benefit from tighter rules in sectors such as oil drilling or toys after a series of incidents and product recalls that have prompted authorities to show more stringent.
The spill in the Gulf of Mexico and the recent recalls of toxic toys and defective car had the effect of encouraging the authorities to create new rules, opening up lucrative opportunities for inspection companies.
This development could result in two or three percentage points of growth in turnover in testing, inspection and certification (ICT) sector by the end of 2010, said Laurent Brunelle, an analyst of Exane BNP Paribas.
The relatively high valuations of listed companies in the sector highlight investor optimism about their potential. The Swiss group SGS, the market leader, is trading at 17.7 times estimated earnings for 2011, the French Bureau Veritas at 15.8 times and 16.6 times Intertek English, is above average 12.2 of the European sector index.
The share price rose by SGS 17% since the beginning of the year and those of Intertek and Bureau Veritas have won over 30% while the sector index took 13%.And analysts believe this upward trend will continue.
In response to the disaster that struck the Gulf of Mexico, a new U.S. law may force oil companies to work with security firms will soon be on the agenda of Congress.
"Currently, there are some great players on the market for offshore oil drilling, such as Bureau Veritas, which holds about 10%," said Laurent Brunelle, noting that the French would be the winner if small rivals were not able to match the requirements of a market much more regulated.
A fragmented market
The market inspection and testing is in fact highly fragmented and composed a large part of small companies specialized in niches as diverse as testing raw materials, consumer products, agriculture, environment automobiles, all areas where government offices are also present.
The trend to increased regulation, globalization and therefore to the outsourcing of testing specialists to ensure the relay three market leaders, whose combined sales totaled about 7.8 billion euros 2009.
"Areas affected by oil spills from BP are the inspection and verification platforms so that companies that should benefit companies are active in the classification of ships.This is the case of Bureau Veritas, American Bureau of Shipping, Det Norske Veritas (DNV) and Germanischer Lloyd, "said Laurent Brunelle.
SMS is also well placed to benefit from U.S. laws more stringent because of its expertise in testing materials.
"SMS is strong in oil, gas and services to chemistry with almost one billion Swiss francs in sales (in 2009) and is very active in North America," says Jean-Philippe Bertschy, Vontobel analyst.
Bureau Veritas has recently strengthened its position in the testing of raw materials by buying the British Inspectorate for 450 million pounds while the SGS search acquisitions.
"SGS would like to enter the marine services," said Laurent Brunelle, adding that Bureau Veritas was best placed to buy the German Germanischer Lloyd if it became a target.
NEW SEGMENTS INVOLVED
In consumer products, the turnover of companies in the sector rose last year after the adoption of the U.S. Consumer Product Safety Improvement Act (CPSIA), in reaction to recalls of toys produced by Mattel in China that contained lead paint and tiny magnets that could be swallowed by children.
'The CPSIA could be extended to all consumer products ", said Chris Burger, an analyst at Helvea."But it's a very political issue and the government does not burden companies with new constraints. This could jeopardize the return to growth."
The new EU directive on toy safety, which comes into force in July 2011, will have a positive but less significant on the testing of major consumer product that CPSIA because it applies only to new toys.
Furthermore, new EU rules that require tires to be tagged for fuel efficiency, the wet grip and noise will be effective as of November 2012. They may require certification companies to strengthen their motor units.
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