You couldn’t accuse Smiths Group (SMIN) of downplaying the performance issues at its healthcare arm, but the FTSE 100 conglomerate hadn’t really provided any numbers to flesh out the concerns – until now.
A pre-close update pointed to encouraging trading at Smiths Detection, Smiths Interconnect and Flex-Tek, along with further confirmation of a gradual return to form for John Crane – a supplier of engineering products for the global energy and process markets. Smiths Medical, however, remains the outlier, albeit because of upcoming EU regulatory changes governing medical devices. They don’t come into force until 2020, but the near-term upshot is that one of the group’s European service providers has been de-certified for some products, with the result that some of the division’s product lines have been suspended for sale in Europe.
It’s not clear how long this situation will persist, but full-year figures will also be held in check by the termination of two contracts in the US, meaning that Smiths Medical will register a 2 per cent revenue decline for the July year-end. Management insists that the division is delivering “good underlying growth” once the one-off disruptions are disregarded, but the market is rarely interested in caveats, so around 9 per cent was wiped off the group’s share price on the day of the announcement.
On the face of it, the markdown looks a little steep, but the division accounts for just under a third of revenues, and the news feeds into concerns over a tightening regulatory regime and a related margin squeeze. At the half-year mark, the division revealed a 290 basis point decline in its operating margin, but it’s difficult to gauge the underlying trajectory of margins, given expenses linked to a raft of new product launches at Smiths Medical, along with hefty R&D allocations and front-loaded development costs.
