ii view: Smiths Group rewarded for resilience

All 75 factories remain open and a new cost-saving programme is being launched. 

Trading update for the four months to 31 May 2020

• Adjusted revenue up 1%
• Access to surplus liquidity of around £950 million
• Launching a strategic restructuring programme

Chief executive Andy Reynolds Smith said:

" Market-leading positions and a flexible business model have enabled the Group to continue to perform through crisis disruption.

"Our immediate focus is the safety of our people and business continuity for our customers. We will continue to take the actions necessary to safeguard our long-term competitiveness. I very much regret that this will result in some job losses. My sincere personal thanks go to the amazing Smiths employees around the world for their dedication and commitment.

"The Group has a resilient business model; market-leading positions, a culture of innovation at its heart, combined with relentless execution. We are confident that we will meet the challenges of the current crisis - and emerge stronger, better able to outperform long-term."

ii round-up:

Niche product maker Smiths Group (LSE:SMIN) today announced both relatively resilient trading in the face of the Covid-19 pandemic along with a cost saving restructuring programme. 

Sales for its John Crane oil & gas component division continued to grow year-to-date despite a recent slowdown caused by a disruption to customer service. Its detection business, making such items as luggage scanners, also performed strongly given prior Covid-19 orders. 

Smith Groups shares rose by more than 7% in afternoon UK trading having fallen by around 17% year-to-date. 

A restructuring programme targeting annualised cost saving of around £70 million by 2022 will now be pursued, aimed at supporting its goal of delivering operating profit margins of between 18% and 20%. The programme will however unfortunately involve job losses. 

All of its 75 manufacturing plants are operational, although additional Covid-19 related costs have been necessary. Smiths manufactures across five areas: security & defence, general industrial, oil & gas, space & aerospace and medical devices. 

It previously announced plans to delay the planned separation and listing of its medical business as it focuses on making and delivering ventilators required under pandemic. 

It currently has access to surplus liquidity of around £950 million. Both the full-year 2019 final and 2020 half-year dividend payment were cancelled given the backdrop of uncertainty. No full-year estimates or guidance is being offered. A review of the dividend suspension may be made at the full-year results on 24 September. 

ii view:

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

But for the group’s medical business, the focus away from industrial technology reduces its cost synergy overlap, leaving it ripe to be separately UK market listed. That was before the outbreak of Covid-19 and a global surge in demand for ventilators. A separation is still eventually planned. 

For investors, Smith offers broad diversification – five current industrial sectors, with production set across 50 countries. Its customers include airport operators, defence departments, the construction industry, energy companies and even NASA. Over 95% of its revenues are generated outside the UK. 

But the company is clearly exposed to virus hit sectors such as energy and aerospace. Sales growth from continuing operations slowed from 2% for the 10 months to May, to 1% in the past four months. There are clearly issues for Smiths, and there are no full-year estimates outlined, but diversification is a plus and Smiths is well positioned for the slow journey back to normal.

Positives: 

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

Negatives:

• Dividend payment suspended                       
• Exposure to unpredictable foreign exchange movements

The average rating of stock market analysts:

Buy