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Smiths hobbled by energy sector's capital constraints

Performance at the the engineering and technology group has been held in check by the continuing weakness in oil & gas markets.
September 28, 2016

Some minor financing gains enabled Smiths Group (SMIN) to book a slight uptick in full-year earnings, but operating profits before restructuring costs, provisions and other one-offs were flat on July 2015. Margin expansion in the medical, detection and interconnect divisions was countered by a 20 per cent fall in underlying operating profits at US subsidiary John Crane, which manufactures mechanical seals used extensively in the petroleum industry and beyond.

IC TIP: Hold at 1424p

Despite favourable currency translation effects, the US subsidiary was the only division within the engineering and technology group that failed to drive up its reported top line through the period, although revenues at its interconnect and Flex-Tek divisions were slightly down on an underlying basis. Front-loaded expenditure in the oil and gas industry has fallen away dramatically over the past two years. However, revenue streams linked to maintenance and remedial activities have held up reasonably well. This is reflected in the underlying performance of John Crane, where weakness in the sales of first-fit equipment contrasted with relatively resilient aftermarket sales. Indeed, 59 per cent of its revenues are now derived from aftermarket products and services.

There's no end in sight to these wider industry problems. The latest spat between Saudi Arabia and Iran highlights the geopolitical complexities at the heart of the Opec cartel. Short of any co-ordinated response to the fall-away in crude prices, it will be some time before the market starts to rebalance. Management doesn’t anticipate any easing in John Crane's end markets, although this should be "more than offset by moderate underlying revenue growth" in the other four divisions. It is also actively trying to increase the proportion of the division's sales derived from non-oil and gas industries, in addition to improving market penetration in important geographies such as China.

Prior to these figures, Morgan Stanley was predicting cash profits of £559m for the July 2017 year-end, giving rise to EPS of 71.6p, rising to £581m and 75.2p in FY2018.

 

SMITHS GROUP (SMIN)
ORD PRICE:1,424pMARKET VALUE:£5.63bn
TOUCH:1,423p-1,430p12-MONTH HIGH:1,441pLOW: 858p
DIVIDEND YIELD:2.9%PE RATIO:22
NET ASSET VALUE:416p*NET DEBT:59%

Year to 31 JulTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20123.0336665.438.00
20133.1139680.139.50
20142.9530259.040.25
20152.9032562.441.00
20162.9534665.642.00
% change+2+6+5+2

Ex-div: 20 Oct

Payment: 18 Nov

*Includes intangible assets of £1.74bn, or 441p a share.