Interactive Investor

ii view: engineer Smiths’ growth at a near-decade high

23rd September 2022 11:36

Keith Bowman from interactive investor

Shares for this FTSE 100 company have performed relatively well year-to-date, but will it last? We assess prospects. 

Full-year results to 31 July

  • Revenue up 6.7% to £2.56 billion
  • Operating profit up 12% to £417 million
  • Final dividend of 27.3p
  • Total dividend for the year up 5% to 39.6p per share
  • Net debt of £150 million, down from £1 billion following the sale of medical business

Guidance:

  • Expects to deliver 4% to 4.5% organic revenue growth with moderate profit margin growth

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Chief executive Paul Keel said:

" We continued to demonstrate strong progress in FY2022, executing at pace on our growth strategy. Along with accelerating growth, we further strengthened our company through increased investments in innovation, commercialisation and supply chain. Still more, we returned £661 million of cash to our shareholders through dividends and share repurchases. 
 
“All of this gives us confidence for continued progress in FY2023.  By focusing on our top priorities of growth, execution, and people, we are creating value for our customers, colleagues, communities and investors.”
 
ii round-up:

Diversified engineering company Smiths Group (LSE:SMIN) today reported its highest annual revenue growth in nearly a decade as demand for aerospace components recovered and sales from process industries such as water treatment and pulp and paper stayed robust. 

Revenues excluding acquisitions climbed 3.8% year-over-year with growth in the second half accelerating to 4.1% from 3.4% in the first half. Revenues including acquisitions rose by 6.7%, pushing adjusted operating profit up 12% to £417 million. 

The FTSE 100 engineer now expects organic revenues for the year ahead to come in at between 4% to 4.5%. 

Smiths Group shares rose by more than 4% in UK trading, leaving them down by around 2% year-to-date. Shares for fellow engineer Rolls-Royce Holdings (LSE:RR.) are down by almost 40% during 2022, while shares for defence contractor BAE Systems (LSE:BA.) have risen by nearly 50%. The FTSE 250 index is down by close to a quarter. 

Pre-tax profits for Smith Group rose to £1.03 billion from the prior year’s £285 million, benefiting from the previous sale of its medical device business as it focused down on engineering. 

Smiths is a supplier of niche products to industries including oil and gas, mining, chemical makers, and airplane manufacturers. A final dividend of 27.3p per share leaves the total for the year up 5% at 39.6p per share.

A first quarter trading update is scheduled for 9 November. 

ii view:

Smiths works on a common operating model. Its businesses all share the characteristics of being well-positioned in growing markets, technology-led, asset-light and with a high proportion of aftermarket revenues. 

It breaks down its sales into four key arenas. General industrial accounting for around 42% of sales. Safety and security, such as airport luggage scanners, generating some 31% of revenues. Energy related products including renewable generation at around 20% of sales and the balance of under 10% from aerospace. Geographically, the USA is its biggest market at around 47% of sales.

For investors, a highly uncertain outlook including elevated inflation, rising interest rates and broader fears of a global recession cannot be overlooked. Rising costs for businesses generally and continued supply chain challenges warrant consideration. As does Smiths exposure to currency movements with less than 4% of sales coming from the UK. 

On the upside, its diversity of product, geographical region and underlying customer sector offer attraction. A strategy focusing on growth, improving operational execution, and enhancing its people is also noteworthy. As is the strength of its balance sheet, aided by the previous sale of its medical devices business. 

On balance, and while some caution looks sensible given the challenging economic backdrop, Smith remains a well-managed and well-positioned business for the longer term.

Positives:

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

Negatives:

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

The average rating of stock market analysts:

Buy

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