ii view: engineer Smiths Group cuts sales forecast

First-half results to 31 January

• Sales for continuing operations down 1% to £915 million
• Operating profit margin up 0.2% to 19.8%
• Operating profit for continuing operations flat at £181 million
• Interim dividend up 5.4% to 15p per share
• Net debt of £843 million, up from £441 million as of late July

Guidance:

• Now expects full-year organic sales growth of between 3% and 4%, down from a previous 4-6%

Chief executive Roland Carter said:

"The first half was important for Smiths with the announcement of the transformational sale of Smiths Detection and Smiths Interconnect, achieving multiples above market expectations and ahead of schedule.

"2026 is a significant year of progress as we reposition Smiths towards higher growth and higher returns markets. 

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ii round-up:

Smiths Group (LSE:SMIN) today downgraded full-year sales growth expectations as the diversified engineer moves forward as two divisions having previously agreed sales of the other two.

Annual sales stripped of acquisitions are now expected to grow by 3-4% compared with a previous forecast of 4-6%. The revised estimate now excludes the airport detection scanners business which has been sold.  

For the remaining two businesses, robust demand for John Crane which sells items like mechanical seals to energy and mining companies compares with further weak demand for its Flex-Tek heating products sold to a weak US construction industry.

Smiths Group shares fell 6% in UK trading having come into these latest results up by more than a third in 2025. The FTSE 100 index rose by just over a fifth. Fellow engineer Melrose Industries (LSE:MRO) climbed by under a tenth last year. 

First-half sales for continuing operations to late January fell 1% to £915 million, while operating profit was flat year-over-year at £181 million. Profit margin increased 0.2% to 19.8%.

Previously agreed sales for detection and the electronics interconnect division for a total enterprise value of £3.3 billion now facilitate a new and additional £1.5 billion of shareholder returns via methods including share buybacks. 

An interim dividend of 15p per share for the period, payable to eligible shareholders on 13 May, is up 5.4% from a year ago.

A recent £164 million acquisition of DRC Heat Transfer adds to the Flex-Tek business, offering exposure to industrial cooling technologies and including data centres.  

Smiths continues to target medium-term sales growth of 5-7%, with an operating profit margin of 20% and progressing towards 21-23%. 

A third-quarter trading update is scheduled for 21 May. 

ii view:

Starting life as a watchmaker, Smiths today sells products to the four industries of energy, industrials, construction and aerospace. Selling businesses previously generating close to two-fifths of overall sales, the FTSE 100 company now operates across a more focused selection of sectors as it targets increased operating efficiency.  

For investors, the downside of separating the existing four divisions is reduced business diversity. Many customers for the remaining John Crane and Flex-Tek businesses are from cyclical industries such as energy, mining, construction and aerospace. Group sales to the US leave Smiths exposed to trade tariffs, while a forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap.

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On the upside, running just two divisions should provide a more focused valuation, while the remaining John Crane and Flex-Tek businesses could be more vulnerable to takeovers. Proceeds from the sale of businesses are largely being returned to shareholders, avoiding the potential for management to reinvest badly. There's also more than 70 years of consecutive dividend payments, which leaves the shares on a forecast dividend yield of around 2%.  

For now, a focus on efficiency and a consensus analyst fair value estimate above £28 per share offer grounds for longer-term optimism. That said, outlook uncertainty given a war in the Middle East and exposure to cyclical industries including aerospace could leave more cautious investors taking a wait and see approach.   

Positives: 

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

Negatives:

• Exposure to volatile industries                       
• Uncertain economic outlook

The average rating of stock market analysts:

Buy