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Smiths Group insulated by aftermarket sales

The conglomerate turned in a creditable performance despite oil price volatility and the civil aviation crisis
March 26, 2021
  • ROCE contracted but remained healthy at 11.2 per cent
  • Cashflow improved as a proportion of revenue

Smiths Group’s (SMIN) mission statement sets out its corporate objective to “make the world safer, healthier and more efficient” – something of a tall order over the past 12 months. Yet shareholders can be satisfied that management has taken appropriate operational measures in response to the pandemic and the subsequent commercial disruption to some of its end-markets.

The conglomerate’s interim returns were ahead of consensus forecasts, with 5 per cent growth in underlying post-tax profits achieved despite a commensurate fall in revenue.

An improved cash-conversion rate underpinned a 71 per cent increase in free cashflow to £188m, equivalent to roughly one-sixth of sales, and a substantial improvement over the 2020 half-year. Return on capital employed (ROCE), though predictably down on the pre-pandemic comparator, remained healthy at 11.2 per cent.

Adverse foreign currency translations and restructuring costs were partly responsible for a decline in headline operating profits, with the margin contracting 60-basis points to 14.4 per cent. However, a sizeable reduction in central costs provides another pointer to the intensified focus on efficiencies.

The top-line decline – 7 per cent on a reported basis – was held in check due to a large proportion of aftermarket sales. This is particularly noticeable in Smiths Detection, which contributes around a third of group revenues. The business sells into the wider aviation industry, so intuitively you would think that the going has been rather tough. Yet aviation sales were 4 per cent to the good on an underlying basis, partly due to a lagged order book, while demand for systems to counter the spread of microorganisms in airport baggage systems has been on the rise. The civil aviation industry remains in a state of flux, but the division continues to drive investments in the development of next generation detection devices for the defence industry where certain programmes are co-funded by strategic customers.

The most pronounced impact of the pandemic was evident in the John Crane unit, which witnessed a 14 per cent fall in revenue to £410m. The business supplies a range of mechanical seals, power transmission couplings and specialised filtration systems, with more than half of related sales attributable to the energy sector. So, the collapse – and subsequent volatility – in the crude oil price had a profound effect on financial performance. Again, however, a sizeable proportion of revenues are derived from aftermarket sales – a more predictable channel.

Smiths Medical performed solidly, and trends remain positive ahead of its separation in the fourth quarter of FY2021.

A decent out-turn for the group, but there is limited value on offer with the shares changing hands at 28 times Goldman Sachs' full-year adjusted earnings forecast. Analysts there anticipate an adjusted EPS of 55.8p in 2021, up from 49.4p in 2020. Hold.

Last IC view: Hold, 1,344p, 24 Sep 2020

SMITHS GROUP (SMIN)   
ORD PRICE:1,556pMARKET VALUE:£ 6.17bn
TOUCH:1,555-1,556p12-MONTH HIGH:1,608pLOW: 1,024p
DIVIDEND YIELD:3.0%PE RATIO:82
NET ASSET VALUE:563p*NET DEBT:51%
Half-year to 31 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2020 †1.2446.02.80nil
2021 †1.1584.05.3011.7
% change-7+83+89-
Ex-div:08 Apr   
Payment:14 May   
*Includes intangible assets of £1.49bn, or 376p a share. † Figures reflect the treatment of Smiths Medical as discontinued operations. NB: FY2020 dividend included delayed interim dividend of 11.0p