Smiths responds to green energy dynamic

Smiths Group (SMIN) beat market expectations in FY2023, posting an 11.6 per cent increase in organic revenue, helped along by a combination of rising volumes and pricing that more than offset inflation. Headline operating profit was 12.7 per cent ahead of the prior year comparator on a 10 basis point increase in the underlying margin. Progress through the period under review was also reflected in a 150 basis point increase in return on capital-employed to 15.7 per cent and a vast improvement in the cash conversion rate. The launch of new products accounted for 3.1 per cent of reported growth.

The industrial technology group has benefited from emerging secular trends, most obviously the decarbonisation agenda. The group’s John Crane subsidiary is seeing increased activity on this basis, specifically in hydrogen and carbon capture markets, as clients intensify efforts to drive energy efficiency and boost investment in technologies linked to low-carbon energy. The increased clamour – substantively the result of government treaty and private mandate – was evident in a 19.5 per cent increase in organic revenue in the group’s energy division.

Sales growth in the general industrial end markets (40 per cent of group revenue) increased by 7.8 per cent, as demand bubbled up for chemical processing, water treatment and life sciences products.

Paul Keel, group chief executive, said that Smiths is targeting capital expenditure on artificial intelligence and other digital technologies, as the group seeks to “capitalise on the growing megatrends [Smiths is] exposed to across the major markets we serve”. Keel expects organic revenue growth of between 4 and 6 per cent, in line with its medium-term target. At 16 times consensus earnings, the group is trading broadly in line with its peer group, but we think it is responding more efficiently to market dynamics. Buy.

Last IC View: Buy, 1,734p, 24 Mar 2023