Interactive Investor

ii view: specialist engineer Smiths Group breaks records

24th March 2023 11:53

by Keith Bowman from interactive investor

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This FTSE 100 company has comfortably outperformed the FTSE 100 index over the last year and these results have been well received. Buy, sell, or hold?

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First-half results to 31 January

  • Revenue up 25.6% to £1.49 billion
  • Operating profit up 27% to £241 million
  • Interim dividend up 5% to 12.9p per share
  • Net debt of £479 million, up from £150 million

Guidance:

  • Now expects full year organic revenue growth of at least 8%, up from 7%, with moderate profit margin improvement

Chief executive Paul Keel said:

"We continued to improve our performance in H1, delivering double digit revenue and earnings growth.  While we are still in the early days of executing our plan, we are pleased with the progress.  I congratulate and thank my 15,000 colleagues around the world for continuing to do what we do best - improving our world through smarter engineering.

With order books healthy and trading strong, we are again raising our FY2023 organic revenue growth guidance.”

ii round-up:

Diversified engineering company Smiths Group (LSE:SMIN) today detailed record organic revenue growth of 13.5%, with both demand and price increases for its products across energy and aerospace helping boost its annual sales forecast.

Revenue growth across all the FTSE 100 company's divisions, geographic regions, and major customer end markets is now expected to underpin full-year organic revenue growth of at least 8%, up from a previous estimate of 7%.

Smiths' share price rose by around 1% in UK trading, near to a record high, having come into this latest news up by around 13% over the last year. That’s similar to aircraft maker Airbus SE (EURONEXT:AIR) and ahead of a 1.5% loss for the 100 index itself. 

Smiths supplies niche products to industries including oil and gas, chemical makers, life sciences, pulp & paper and aircraft manufacturers. Total sales and including one acquisition for the first half to the end of January climbed 25.6% to £1.49 billion, pushing operating profit up 27% to £241 million. 

It continues to pursue an improvement plan to accelerate growth, strengthen execution and invest in innovation. It previously sold its medical device business to concentrate purely on specialist engineering.

Organic sales growth of 17% for energy related products led the way during the half year, followed by a 15% rise for general industrial products and 10% gain for aerospace components. 

A 13.5% increase in R&D spend helped Smiths launch new products during the period. The interim dividend was upped by 5% to 12.9p per share. 

A third-quarter trading update is scheduled for 19 May. 

ii view:

Tracing its roots back to 1851, today the engineer divides its products into the four core arenas of general industrial, safety and security, energy, and aerospace. 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. 

General industrial accounts for around 42% of sales; safety and security, such as airport luggage scanners, generates 31% of revenues; energy-related products including renewable generation come in at 21%; aerospace is a further 6%. Geographically, the USA is its biggest market at almost half of overall sales.

For investors, a highly uncertain economic outlook including rising interest rates and recent challenges in the banking sector are not to be ignored. Elevated costs for businesses generally and continued supply chain challenges warrant consideration, as does Smiths exposure to currency movements, with less than 3% of sales coming from the UK. 

On the upside, its diversity of product, geographical region and underlying customer sector is attractive. A strategy focusing on growth, improving operational execution, and enhancing its people is also noteworthy, while the balance sheet has been strengthened by the sale of its medical devices business. 

In all, and while some caution remains sensible, this well managed company looks to remain deserving of its place in many already diversified long-term focused portfolios.

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

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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