UPDATE 2-Testing firm SGS cuts costs to keep on track

Tue Jul 17, 2012 8:43am EDT

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* H1 net profit 245 mln Swiss francs, vs 274 mln poll

* One-off charge of 26 mln francs due to cost cuts

* Maintains outlook despite euro zone challenges

* Shares up 2.6 pct, outperform sector (Adds analyst comment, quotes, shares, details)

By Emma Thomasson and Emma Farge

ZURICH/GENEVA, July 17 (Reuters) - SGS, the world's largest testing and inspection group, said cost cutting and investment in emerging markets should help it to meet full-year targets after a one-off restructuring charge led it to miss first-half profit expectations.

The Swiss group, whose activities include checking toy safety and testing oil wells, said on Tuesday strength in energy and mining businesses and an increase in government regulation was helping to offset slower growth in the euro zone.

"We are experiencing some slowdown in Europe but it is not tanking. Africa and the Middle East are growing very well for us," Chief Executive Chris Kirk told reporters.

SGS said it was being proactive to respond to changes in demand, with restructuring and job cuts resulting in a one-off charge of 26 million Swiss francs ($26.5 million) in the first half, with the measures expected to yield benefits from 2013.

It declined to give further details.

The Geneva-based firm, which competes with Britain's Intertek and France's Bureau Veritas, said first-half net profit rose 1.7 percent to 245 million francs.

That was lower than the forecast 274 million due to the restructuring costs.

"The big push on restructuring was in the first half. The likelihood is that there will be more restructuring in the second half but it will be minor compared with the 26 million," Kirk said, citing Italy as a likely place for further cuts.

First-half revenue grew 15.1 percent on a constant currency basis to 2.7 billion francs, meeting analysts' average forecast and helped by the integration of 24 recently acquired companies.

Vontobel analyst Jean-Philipp Bertschy, who rates the stock a "buy", estimated the restructuring should save 30 million francs in costs, boosting margins by 50 basis points.

"Investment case intact: SGS is able to deliver strong growth in a challenging environment and has a defensive profile thanks to a broad base portfolio, plus integration from acquisition with high synergies," he said in a note.

Patrick Hasenbohler, equity analyst at Sarasin, gave a neutral rating.

"SGS is not entirely immune to the economic cycle, although it is less cyclical today than in the past," he said.

SGS shares, which have gained 17 percent this year, were up 2.6 percent at 1220 GMT, outperforming a flat European industrial goods and services index.

ACQUISITIONS

SGS completed seven acquisitions for a total cash outflow of 100 million francs in the first half including Chilean mining services company CIMM T&S.

Asked if the pace of purchases could continue, Kirk said: "We hope so ... We are actively looking for new businesses to bolt onto our existing services," he said.

The shale gas boom, new mining projects in Mongolia and a new mandate with the Democratic Republic of Congo government to help crackdown on timber smuggling are helping to support growth, the company said.

SGS saw double-digit organic revenue growth in the period in five business lines: mineral services, government and institutions, agricultural, oil, gas and chemicals and consumer testing services.

The firm said it was maintaining its expectations to deliver strong revenue growth and an adjusted operating income in excess of levels in previous years.

Still, Kirk said last month SGS had to pare back its ambitious target of reaching 8 billion francs sales by 2014 due to the strong Swiss currency.

He said on Tuesday that the Swiss National Bank's decision to cap the value of the franc at 1.20 per euro in September meant the currency impact was diminishing.

"A very strong Swiss franc had a negative impact on us last year ... Because of the peg, the translation impact is getting less for us," said Kirk.

The worst performing segment in the first half was life science services -- the only sector which saw organic revenue growth shrink due to a decline in clinical research activity.

Kirk said the company would decide the future of this business by the end of the year, adding that options included the merging of two European clinics and divestment.

($1 = 0.9812 Swiss franc) (Reporting by Emma Thomasson and Emma Farge; Editing by Mike Nesbit and Mark Potter)

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