Smiths has a stronger mix

During the period, Smiths hived off four “non-core” businesses, including microwave telecoms and artificial lifts, generating £399m in disposal proceeds. It also responded to increased global insecurities by acquiring California-based Morpho Detection, a manufacturer of security systems for airports, border crossings and nuclear power plants. Regrettably, these types of businesses fall within the ‘growth’ category nowadays, but it’s too early to gauge Morpho’s lasting impact on sales and margins.

Even so, the impact of management strategy is becoming apparent at the operating level. The portfolio repositioning is designed to replace annual revenue in decline for growing revenues with higher margin – hardly a novel concept. But we believe the improvement on show has as much to do with improved working capital discipline as it does with M&A – although the latter obviously makes for better headlines. Although group revenue was broadly static once currency effects are discounted, headline operating margins improved for every division, including the John Crane business which has suffered with its oil and gas sector in recent years.

But it’s amazing the difference management can make to a business by simply ‘looking under the bonnet’. Efforts on strategic sourcing have already delivered around £40m of procurement savings, while an emphasis on accelerating inventory turn contributed to a 52 per cent increase in free cash flow to £370m. Add in a cash conversion rate of 118 per cent and it’s clear that management hasn’t just been tinkering at the margins.

Credit Suisse forecasts adjusted pre-tax profit of £537m and EPS of 94.1p for the year to July 2018, against £528m and 96.4p in FY2017.