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Smiths eyes further change

The industrial conglomerate is gaining on the back of heightened security anxieties
March 28, 2017

In another troubling month on the security front, in which large electronic devices were banned from cabins on some UK-bound flights, last year's decision by Smiths Group (SMIN) to acquire a California-based maker of security systems for airports, border crossings and nuclear power plants looks in step with the times.

IC TIP: Hold at 1624p

The $710m (£568m) deal to bring Morpho Detection within the fold is in the final stages of regulatory clearance, but the performance of the conglomerate’s existing security and detection segment at the half-year mark - double-digit underlying revenue growth and a 440 basis-point surge in operating margins - underlines the potential of this business strand.

Security aside, underlying revenues were flat compared with the same period last year. But what Smiths did with those revenues explains why its shares were marked up on early trading, highlighted by margin progress across the board, and a cash conversion rate of 115 per cent. The latter metric, when combined with positive currency translations, fed into a 44 per cent surge in free cash flows. Although sterling’s relative weakness increased the value of its foreign-currency debt by around £36m, underlying debt reduced by £367m, mostly due to disposal proceeds.

The transition of sales through to bottom line earnings will please analysts and shareholders alike. Disregard one-off effects and Smiths delivered underlying operating profits of £277m, representing an 8 per cent increase on 2016, with margins 150 basis points to the good.

This time last year, the pressures faced by the group's John Crane division were already apparent, as faltering demand for Crane's engineered products among the energy services sector hit the division’s margins and pushed underlying operating profits into retreat. Crude oil prices have stabilised in the intervening period, although it will take some time before industry capital expenditure budgets retrace significantly. Nevertheless, shareholders can draw some comfort from a return to growth in aftermarket sales at John Crane - there’s a long road ahead, though.

Deutsche Bank gives adjusted pre-tax profits of £515m and EPS of 98.4p for the July 2017 year-end, against £451m and 84.2p in FY2016.

SMITHS GROUP (SMIN)

ORD PRICE:1,624pMARKET VALUE:£6.42bn
TOUCH:1,622-1,628p12-MONTH HIGH:1,628pLOW: 1,028p
DIVIDEND YIELD:2.6%PE RATIO:15
NET ASSET VALUE:460p*NET DEBT:35%

Half-year to 31 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20161.3716832.813.25
20171.6234676.513.55
% change+18+106+133+2

Ex-div: 6 Apr

Payment: 28 Apr

*Includes intangible assets of £1.64bn, or 415p a share.