Smiths Group medical plan removes lid on share price

Its quarterly results may have failed to inspire, but Graeme Evans reports a positive reaction to the long-running saga involving Smiths' medical arm.

One of the longest running sagas in the FTSE 100 index put in another appearance today as Smiths Group revealed plans for major surgery to finally sort the future of its Medical division.

The intention to spin off the business and focus Smiths on industrial technology was well received by investors, with the under-pressure share price up 6% despite a long history of false dawns involving the Medical arm.

As recently as this summer, Smiths talked to US-based ICU Medical about creating a £7.5 billion healthcare group before the Nasdaq-listed firm made an outright offer reportedly valuing the Medical arm at £2.8 billion.

Other takeover approaches happened in 2011 and 2013, while Smiths has routinely rejected investor pressure that it should break itself up.

Whether things will be any different with the medical business this time is hard to tell, given that the separation process is at an early stage. An update is planned with the group's interim results in March.

Source: TradingView (*) Past performance is not a guide to future performance

Explaining the rationale for the split, Smiths said it would free the medical arm to "deliver on its full potential" while leaving behind four businesses that have more in common in terms of characteristics and operating models.

The separation will also remove an underperforming part of the company, with Medical enduring a lumpy performance in recent years and reporting a 2% underlying revenue drop in the 2018 financial year.

It is still just about the group's biggest division with 28% of total revenues, although the oil and gas flow control business John Crane accounts for more of operating profits.

Analysts at Deutsche Bank said: "With the division underperforming peers, it has been a headwind for the group and impacted sentiment on the name, so today's move is welcome, but a trade sale would have been better in our view."

They have a price target of 1,665p, which is similar to JP Morgan Cazenove after the bank raised Smiths to ‘overweight' from ‘neutral' in the wake of today's developments and first quarter trading update.

Underlying revenues for the three months to October 31 were down 1%, despite continued good growth from John Crane, Smiths Interconnect and Flex-Tek, which produces components to heat and move fluids and gases.

The Smiths Detection security business has been impacted by the phasing of orders but is still expected to deliver a strong second half. The medical division, which provides devices used during critical and intensive care, is also expected to return to growth as regulatory and contract challenges start to ease.

Much of this pressure relates to preparations for the new EU Medical Device Regulation, which has led to delays in re-certifying some of Smiths Medical's products ahead of 2020.

Deutsche Bank analysts described the Q1 performance as "in-line but uninspiring".  They said the company's forecast that full-year underlying growth will be similar to last year's rate of 2% was slightly lower than their expectations for an improvement of 2.9%.

Smiths is currently trading on a 2019 valuation to earnings multiple of 10.1x, which compares with 12.5x for the UK capital goods sector. Shares hit 1,800p in June, only to fall to as low as 1,287p in October.

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