Interactive Investor

ii view: engineer Smiths announces new CEO and £100m share buyback

Offering exposure to areas such as renewable energy and aerospace, and with a new chief executive at the helm. Buy, sell, or hold?

26th March 2024 16:06

Keith Bowman from interactive investor

First-half results to 31 January

  • Adjusted or organic revenue up 3.9% to £1.5 billion
  • Operating profit up 2% to £246 million
  • Interim dividend up 5% to 13.55p per share
  • New £100 million share buyback programme

Guidance:

Continues to expect full year 2024 organic sales growth of between 4% and 6%

Chief executive Paul Keel said:

"We continue to focus on innovation as an enduring driver of value. We also continue to strengthen our energy transition impact, with significant project wins in carbon capture, blue hydrogen and electric battery manufacturing.

"As we continually advance our purpose of improving our world through smarter engineering, we are pleased to announce that the Smiths Group Foundation is now awarding its first set of grants to charities which are aligned with our purpose.

ii round-up:

Diversified engineer Smiths Group (LSE:SMIN) today detailed increased profits fuelled by demand for its energy industry components and advanced airport detection systems, enabling a new £100 million share buyback programme. 

First-half sales stripped of acquisitions climbed 3.9% to £1.5 billion, pushing a 2% increase in operating profit to £246 million. Head of Detection, Roland Carter, will now lead Smiths Group as chief executive Paul Keel returns to the US after three years in charge. 

Shares in the FTSE 100 company rose 3% in UK trading having come into this latest news down by a similar amount over the last year. That’s similar to aircraft maker Boeing Co (NYSE:BA) and behind a 6% increase for the FTSE 100 index itself over that time. 

Smiths supplies niche products to industries including oil and gas, chemical makers, pulp & paper makers and aircraft manufacturers. 

Next-generation diamond coated components for the oil and gas industry helped push 13% sales growth at its John Crane division. Sales at Detection, which makes items such as luggage scanners, rose 9%, aided by demand for software using AI to provide automated detection.

That more than countered 4% and 14% sales falls at Flex-Tek piping and Interconnect electronics divisions, hindered by factors including construction sector weakness and the timing of defence industry related orders. 

Accompanying management guidance was unchanged, pointing to full year 2024 organic sales growth of between 4% and 6%. 

An interim dividend of 13.55p is up 5% year-over-year. A third-quarter trading update is expected 21 May. 

ii view:

Tracing its history back to 1851, specialist engineer Smiths today provides products across the four arenas of general industrial, safety and security, energy, and aerospace. Its businesses all share the characteristics of being well positioned in growing markets, technology-led, and with a high proportion of aftermarket revenues. It previously sold its medical device business to concentrate purely on specialist engineering. 

For investors, high interest rates and their impact on group markets such as construction cannot be ignored. Demand from aerospace customers remains cyclical and volatile, costs generally for businesses and including wages are now elevated, while currency moves are a constant with less than 3% of group sales made in the UK. 

On the upside, its diversity of product, geographical region and underlying customer sector are attractive. Exposure to areas such as renewable energy and outer space provide potential growth opportunities, the new CEO is likely to attempt to inject renewed vigour into its strategy, while a forecast dividend yield in the region of 2.6% is not to be ignored.  

For now, and despite ongoing risks, investors with a long-term view will appreciate the strong performance of this diverse, well-run technology and engineering business. A consensus analyst estimate of fair value near £20 per share is also some way above the current price.

Positives: 

  • A diversity of business type, underlying customer, and geographical location
  • High proportion of aftermarket revenue

Negatives:

  • Exposure to volatile aerospace markets and companies                       
  • Uncertain economic outlook

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.