Patient revival

Smiths Group 17 March 2016 QuickView

Smiths Group

Patient revival

General industrials

QuickView

17 March 2016

Price

1050p

Market cap

£4,149m

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Share details

Code

SMIN

Listing

LSE

Shares in issue

395.1m

Business description

Smiths Group delivers products and services for the threat and contraband detection, medical devices, energy, communications and engineered components markets worldwide. It operates through five divisions: John Crane (mechanical seals), Medical, Detection, Interconnet and Flex-Tek.

Bull

High-quality market-leading global businesses

New executive management team focusing on operational improvement, growth potentials and cash generation

Pension fund agreements significantly enhance cash flow outlook

Bear

Industrial conglomerate structure continues to fail to deliver consistent growth

Under represented in emerging markets particularly in Asia

John Crane exposure to oil markets weighing heavily on performance despite high returns

Analysts

Andrew Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

The new executive team faces much the same issues that the two previous CEOs encountered. The portfolio of businesses that form Smiths Group have little industrial synergy which, given its historical active transitions, raises questions over whether the current structure optimises value for shareholders. Further improving operational performance appears key to facilitating strategic decisions, aided by reduced pension cash funding.

Interim results mix not encouraging

At the half year, the group’s performance remains on track to deliver already subdued expectations for FY16. However, John Crane’s performance proved slightly less resilient than has historically been the norm, with a 7% decline in high margin aftermarket sales, worse than most expected. With Medical and Detection both modestly better and Interconnect and Flex-Tek essentially flat, overall group performance in the seasonally stronger H2 is expected to show a similar absolute decline in profits.

New management needs to reinvigorate

Smiths’ history has been marked by successful transitions in its areas of focus. More recently the group’s structure has remained broadly unchanged since the disposal of the aerospace activities in 2007. Unfortunately this period also coincided with the lower global growth dynamic, driven in part by more constrained government spending, a situation that has now been compounded by the reversal in energy markets for John Crane. While the evidence of the interim results confirms the high quality of the five divisions, we feel the new CEO and CFO will drive an even greater focus on operational improvement and cash-flow generation. The question of group structure has yet to be addressed.

Valuation: Attractive yield awaiting developments

Earnings expectations remain subdued for Smiths Group, with attainment of FY15 EPS not forecast even in FY18. Management appears comfortable with consensus for the current year. An improvement in this profile appears plausible as John Crane stabilises, but acceleration of the top line remains elusive. Management is seeking to improve cash performance alongside the operational enhancement, and the new pension funding arrangements in the UK provide a major kicker in this regard. However, until organic growth is re-established, a consensus P/E rating in line with the long-term average for the capital goods sector looks appropriate.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

07/14

2,952

445

81.8

40.3

12.8

3.8

07/15

2,897

459

86.1

41.0

12.2

3.9

07/16e

2,839

418

77.5

41.6

13.5

4.0

07/17e

2,895

435

80.7

42.2

13.0

4.0

Source: Smiths Group, Bloomberg

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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