ii view: Smiths Group speeds up production of ventilators

A separation of its medical business is being delayed and the dividend payment cancelled. 

Half-year trading update to 31 January 2020

• Delaying the separation of medical business
• Not paying an interim dividend
• Withdrawing full-year 2020 guidance

Chief executive Andy Reynolds Smith said:

"I have been inspired and am so proud of everything our people are doing around the world as we navigate Smiths through these unprecedented and challenging times. Smiths is a strong and naturally resilient business and we will come through this period well positioned for the future.  Our business benefits from financial strength, flexibility and a strong balance sheet with significant liquidity.  We are keeping our customers running, whilst staying safe and looking out for each other through the disruption. I'm very grateful to our global team for all their efforts."

ii round-up:

Niche product maker Smiths Group (LSE:SMIN) is now delaying the previously announced separation and listing of its medical business as it focuses on the manufacturing and delivery of ventilators required due to the Covid-19 pandemic.

Within the trading update, which replaced half-year results under new UK financial authority guidance, Smiths also cancelled its interim dividend and withdrew previous full-year 2020 guidance given current virus uncertainty. 

Its shares rose by more than 5% in UK morning trading having fallen by almost 30% year-to-date. 

Smiths, with operations in China, called its central crisis team into action back in January as it first battled Covid-19. 

While 3% underlying revenue growth for continuing operations had been seen up until the end of January, trading into the second-half had weaken as the pandemic spread globally. 

Ramped up ventilator production had been offset elsewhere across the group as some customers closed facilities. But its John Crane oil & gas component division was still benefiting from aftersales while its detection business, including airport luggage scanners, still sat on a record order book.  

Manufacturing across the five arenas of security & defence, general industrial, oil & gas, space & aerospace and medical, sites accounting for more than 90% of output remained opened, although at reduced capacity due to infection control. 

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, with a wait-and-see approach arguably most sensible for now. 

Positives: 

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

Negatives:

• Interim dividend payment cancelled
• Exposure to unpredictable foreign exchange movements

The average rating of stock market analysts:

Buy