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Smiths waits for a bounce back in aviation volumes

Supply chain problems continue, but there are signs of light for the engineer's underlying businesses
Smiths waits for a bounce back in aviation volumes
  • Civil aviation volumes continue to weigh on profitability
  • Improved demand for Flex-Tek and Smiths Interconnect product lines

Smiths Group (SMIN) warned that supply chain issues are likely to persist through the remainder of the year despite effects to mitigate their impact. Said issues will continue to feed through to higher input costs, while management admitted that wage inflation could constrict profitability.

These problems aside, and it’s worth remembering that they are the product of external issues, the industrial conglomerate delivered a half-year report which outlined organic revenue growth across three of its four divisions, the outlier being Smiths Detection, a reflection of a weak original equipment (OE) market in aviation. The OE business strand registered a 17.5 per cent fall in underlying sales, hardly surprising given depressed traffic volumes in the civil aviation space.

Management points out that this also reflects the cyclical nature of OE sales, as the lion’s share of pre-pandemic orders have now been delivered and “subsequent aviation OE tender activity has been subdued”. On the positive side of the ledger, order intake is now growing, and perhaps of even greater significance is that aftermarket sales (54 per cent of the divisional total) are back in growth territory.

Aerospace is the smallest end-market by revenue, but it was preeminent in term of organic sales growth, delivering a 16.7 per cent increase through the period, as increased aircraft construction volumes triggered demand for the group’s Flex-Tek and Smiths Interconnect product lines. Organic revenue growth linked to Smith’s largest end-market, general industrial (40 per cent of group sales), came in at a more modest 5.7 per cent, helped along by the performance of the John Crane business, as demand ticked up from sectors such as chemical processing and mining.

The sale of the medical division resulted in a net cash position, against a prior year net debt multiple of 1.7 times adjusted cash profits, while a resultant £742mn share buyback is now 25 per cent complete. The sale also affords greater leeway on the M&A front, although the fact that capital expenditure is outstripping depreciation and amortisation shows that organic growth remains the priority, also illustrated by an 8 per cent increase in research and development spending.

Management has maintained full-year guidance of at least 3 per cent organic sales growth, driven by improved volumes at Flex-Tek and Interconnect. Analysts at JPMorgan Cazenove give an undemanding enterprise/trading profit (ex-depreciation) multiple of 12.8 for FY 2023 and a share price target price 22 per cent in advance of the current level. Buy.  

Last IC view: Buy, 1,419p, 28 Sep 2021

SMITHS GROUP (SMIN)   
ORD PRICE:1,486pMARKET VALUE:£5.71bn
TOUCH:1,486-1,487p12-MONTH HIGH:1,670pLOW: 1,323p
DIVIDEND YIELD:2.6%PE RATIO:24
NET ASSET VALUE:819p*NET CASH:£225mn
Half-year to 31 JanTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20211.1584.05.3011.7
20221.1916029.112.3
% change+4+90+449+5
Ex-div:7 Apr   
Payment:13 May   
*Includes intangible assets of £1.5bn, or 391p a share.