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Smiths recovery on track despite oil and gas drag

The engineering conglomerate's shares slipped 4 per cent, despite delivering better-than-expected half-year profits
March 16, 2016

Achieving profit growth in the UK engineering sector right now is worthy of a medal. So these half-year figures, on a statutory level at least, are probably deserving of the "solid" verdict delivered by new Smiths Group (SMIN) boss Andy Reynolds Smith. However, when you factor lower restructuring, asbestos litigation and write-downs on acquisition charges, the outcome was a more humbling 9 per cent fall to £189m.

IC TIP: Buy at 1071.5p

As expected, the guilty party was the engineer's oil and gas operations. Underlying operating profit there declined 24 per cent to £78m, as lower volumes and investment caused divisional margins to tighten by 330 basis points to 19.9 per cent. Resilience from the group's aftermarket operations ensured that return on sales didn't decay even further. Cost control action, which is due to continue, was also decisive.

Fortunately, Smiths' diversified corporate structure made amends for John Crane's downturn. There was a decent showing from the detection unit, as its high-tech radars attracted increased interest in the wake of terrorist attacks. Efforts to bolster competitive positioning in higher-margin aftermarkets underpinned 4 per cent sales growth and translated into underlying operating profit growth of 38 per cent. Elsewhere, the provision of new infusion pumps to the hospital market cemented another decent year for the medical arm. Strong uptake of new products, coupled with tight cost controls and the benefits of the restructuring programme, saw divisional profit rise 9 per cent.

Influenced perhaps by the success of these product launches, Smiths' new management team revealed that increased expenditure on research and development forms a key part of the strategy to deliver above-market growth. Other measures outlined included pumping more into sales and marketing, with a view to increasing the group's exposure to expanding economies such as China and India.

While impressed with these results, further weakness at John Crane prompted analysts at JPMorgan Cazenove to downgrade adjusted EPS forecasts for the July year-end by 3 per cent to 80.4p. That's below both last year's figure of 86.1p and the estimate of 90.7p pencilled in for 2017.

 

SMITHS GROUP (SMIN)
ORD PRICE:1,071.5pMARKET VALUE:£4.23bn
TOUCH:1,071-1,072p12-MONTH HIGH:1,243pLOW: 858p 
DIVIDEND YIELD:3.8%PE RATIO:15
NET ASSET VALUE:387p*NET DEBT:64%

Half-year to 31 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151.4213121.813.00
20161.3716832.813.25
% change-3+28+50+2

Ex-div: 24 Mar

Payment: 22 Apr

*Includes intangible assets of £1.6bn, or 416p a share