ii view: Smiths Group in confident mood

Diversified specialist product maker Smiths prepares to finally separate its medical business.

Full-year results to 31 July 2019

• Revenue up 7% to £2.49 billion
• Adjusted operating profit up 10% to £427 million
• Pre-tax profit up 6% to £304 million
• Dividend payment up 3% to 45.9p per share

Chief executive Andy Reynolds Smith said:

"FY2019 was a significant year in the evolution of Smiths. We continue to build sustainable growth, paving the way to outperform our markets.  Importantly, this growth was coupled with enhanced margins, we have now delivered a 300 basis points margin improvement since 2016.  In addition, we continued to optimise our portfolio, with two acquisitions completed in the year.

"In this context of progress and confidence in the future, we announced plans to separate Smiths Medical to create two stronger, industry-leading companies. I am delighted to have welcomed JehanZeb Noor as CEO of Smiths Medical. The separation process is progressing well; we are on track for demerger by the end of the first half of CY2020.

"In FY2020 we expect to make further progress, with year on year growth weighted towards the first half and resulting in a more even balance in overall performance between the first and second halves.  At current rates, foreign exchange will provide a tailwind to revenue and profit."

ii round-up:

Established in 1851 as a London jeweller, today Smiths Group (LSE:SMIN) defines itself as a diversified technology company.

It currently operates across the five arenas of security & defence, general industrial, oil & gas, space & aerospace, and has plans to demerge and separately list its medical business.  

This manufacturer of niche products employs over 20,000 people across 50 countries. Its customers include airport operators, defence departments, the construction industry, energy companies and even NASA. 

These full-year results came in at the upper end of forecasts. Its energy-exposed John Crane division, manufacturing products such as power transmission couplings, led the way - revenue and operating profit grew by 8% and 6% respectively. 

The Interconnect division, supplying products including cables, test sockets and electronic connectors to industries such as defence and railways enjoyed a 6% gain in operating profit, while its Flex-Tex division, making components to heat and move fluid and gases for industries such as aerospace, medical and construction, reported a 4% profit increase. 

A drag from the timing of deliveries for its Detection division, supplying items including luggage x-ray machines to airport operators, crimped its performance with profits down 7%, while the soon to be separated Medical business celebrated a return to sales growth driven by an increased contribution from new products. 

The share price was little changed in late morning UK stock market trading. 

ii view:

Working on a common operating model, the group's businesses all share the similar characteristics of being well-positioned in growing markets, technology-led, asset-light and with a high proportion of aftermarket revenues. 

But for Smiths' medical business, the focus away from industrial technology reduces its cost synergy overlap, leaving it ripe to go its own way. 

For investors, Smiths offers broad diversification, given its exposure to underlying customer industries and the array of countries its products are exported to - over 95% of its revenues are generated outside the UK. A progressive dividend policy and a prospective yield close to 3% add further attraction. But a forward price/earnings (PE) ratio above both the 3 and 10-year averages arguably leave it looking up with events. 

Positives: 

• A diversity of business type, underlying customer and geographical location
• Progressive dividend policy

Negatives:

• Exposure to unpredictable foreign exchange movements
• Global trade war could impact performance

The average rating of stock market analysts:

Strong hold