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We update our estimates to reflect the fact that we expect Smiths Interconnect to be disclosed as discontinued in the FY 25 results. We reduce our FY 25 and FY 26 FD EPS estimates by 14% as a result. Our FY 25 FD EPS estimate on a total group basis is largely unchanged. We increase our FY 25 net debt (inc. leases) estimate from £443m to £496m to reflect the progress on the buyback. We expect FY 26 guidance to be in the ‘traditional’ organic revenue growth target range (4-6%). At John Crane, c.70% of sales from AM provides resilience during macro volatility. At Flex-Tek, momentum is building and will be helped by innovative, patented products. At Detection, we expect high levels of installation activity to continue. At Interconnect, read across suggests a continued strong trading performance, supportive for the disposal process. With the separations of Interconnect and Detection there are clear catalysts on the horizon. Buy, TP from 2,560p to 2,760p; for a business of FutureSmiths’ quality, a CY 26 EV/EBIT of 10x significantly undervalues it.
Smiths Group Plc
Strong Q3, although John Crane lags the rest Smiths Group has issued a Q3 trading update. Group organic sales growth for the three months to 3 May was 10.6%, meaning the 9-month rate of growth is now 9.6%. Bloomberg Consensus sits at just 7% for H2 and 8% for the FY25e. John Crane saw only marginal organic sales growth, while Consensus models mid-to-high single digits. Management points to a tough comp and a prolonged impact of January''s cyber incident. John Crane is now seen growing at a similar rate in H2 to H1 (4%), likely a little light of pre-release Consensus. Flex-Tek growth has accelerated in Q3 to HSD rates, thanks to Aerospace and Construction based demand. Consensus only models c. 3% for H2, so we will likely see some upgrades to forecasts for Flex-Tek. Detection delivered strong double digit organic revenue growth. Consensus models c. 7% for H2 - again upgrades are implied. Interconnect achieved low double-digit growth. Consensus sits at 9%. Management guides to the top of the range - but risk could be skewed to the upside Management now expects Group organic sales for FY25e to be at the top end of the 6-8% organic sales growth range and for the adjusted operating profit margin to expand by 40-60bps. Consensus is already there (8% organic sales growth and 43bps margin improvement). Such a strong Q3 is likely to be taken well by investors and hints towards a possible FY25e beat. Final quarter Group organic sales growth will have to slow to 4% for Smiths not to beat the top end of guidance (8%). While sales may beat, FY25e margins may come in around the level that is guided for. John Crane is Smiths highest margin business; faster growth from lower margin activities (Detection, Interconnect) represents a headwind. Ultimately, John Crane''s H2 growth issue is temporary (Cyber Incident); most investors should quickly look through it. We update our forecasts for latest trading; Neutral reiterated We update our forecasts to reflect...
Smiths has released a strong Q3 update, highlighting good organic growth (+10.6%) and FY guidance reaffirmed with growth expected at the top end of its 6-8% organic range. We continue to rate Smiths as one of our top-picks. Positive trading Q3 revenues grew 10.6% organically, giving organic growth year-to-date of 9.6%, driven by strong growth in Detection and Interconnect and improved sequential momentum at John Crane and Flex-Tek. £260m shares have been purchased of the £500m share buyback programme and it is on track to complete by the calendar year-end. FY25 guidance reaffirmed Given strong year-to-date trading and a good order book, management reaffirms its FY25 guidance for full-year organic revenue growth of 6-8%, now expected towards the top end of that range, and operating margin expansion of 40-60bps. This is also supported by delivery of its ‘Acceleration Plan’. This guidance also incorporates the potential impact of US tariffs (limited impact expected, note: 45% of Group sales are from the US). Strategic actions Following the announcement in January, the sale of Interconnect is ‘firmly underway’ and the preparatory work to separate Detection is ‘moving forwards’. New enhanced targets reminder At the H1’25 results (25 March 2025) management announced new Group targets under its FutureSmiths (Smiths post Interconnect and Detection disposals) strategy. Targets include; organic growth of 5-7% (from 4-6%, +M&A), EPS growth >10% (from 7-10%, +M&A), operating profit margin 21-23% (from 18-20%), RoCE >20% (from 15-17%), and cash conversion of c.100% (unchanged).
Smiths Group has just released its Q3''25 trading update; key takeaways include... Sales: Group organic sales growth for the three months to 3 May was 10.6%, meaning the 9-month rate of growth is now 9.6%. Bloomberg Consensus sits at just 7% for H2 and 8% for the FY25e. . John Crane: Only saw marginal organic sales growth, while Consensus models mid-to-high single digits. Management mentioned a tough comp and the impact of January''s cyber incident. Systems are now all back up and running but still have some knock-on disruptive effects. Management now expects sales to grow at a similar rate in H2 to H1 (4%), with Q4 up vs. Q3. Overall, this message implies performance likely a little light of Consensus. . Flex-Tek: Growth accelerated to HSD, thanks to Aerospace and Construction based demand. Consensus is only modelling c. 3% for H2. . Detection: Strong double digit organic revenue growth. Consensus models c. 7% for H2. . Interconnect: Low double-digit growth. Consensus 9%. Orders: Management talks of ''momentum'' in the order book. Outlook: Management now expects Group organic sales for FY25e to be at the top end of the 6-8% organic sales growth range and for the adjusted operating profit margin to expand by 40-60bps. Consensus is already there (8% organic sales growth and 43bps margin improvement). Tariffs: Smiths generates c. 45% of its sales in the US, with the significant majority produced within the US. It expects the impact of tariffs to be limited given the deployment of mitigation actions, which include accessing available exemptions, pricing surcharges and being flexible with alternative supply sources. FY''25 guidance includes the impact of current tariffs, and the Company has not seen any materials customer behaviour changes to date. Strategic actions: The Group remains on track for an announcement of a sale of Smiths Interconnect by the end of CY''25, followed by the Separation of Smiths Detection through a UK demerger or sale. The...
H1''25 - Sales in line, margin light, cyber security incident impacted John Crane H1''25 Group sales of GBP1,608m and organic sales growth of +9% came in line with BBG Cons. expectations. Q2 saw an implied organic sales growth of +2.4% following +15.8% in Q1. Notably, John Crane delivered a miss of c.-300bps while Flex-Tek was in-line, and Detection and Interconnect beat expectations by c.+200bps and c.+800bps respectively. Orders were robust in Detection, driven by Safety and Security. H1 adjusted operating profit came in -2% below BBG Cons. with a margin of 16.7% (41bps YoY; -20bps below Cons). A big beat in Interconnect (+210bps ahead) offset the underwhelming margins in the other divisions. Additionally, a late January cyber incident impacted John Crane''s revenue and orders, continuing into Q3 and tempering FY25 growth expectations. FY''25 guidance reiterated, acquisition of Duc-Pac, medium-term targets upgraded Smiths reaffirmed its FY''25 guidance with organic revenue growth outlook of +6-8% and operating profit margin expansion of 40-60bps YoY. This would be driven by operating leverage and savings in H2''25. John Crane''s growth is expected to improve in H2 compared to H1 supported by a robust order book. The GBP500m share buyback programme is on track where GBP150m has been completed by March 2025 and the additional GBP350m would be completed by end CY2025. Smiths announced the acquisition of Duc-Pac, a US-based metal duct manufacturer, for GBP32m. The Group''s plans to exit Detection and Interconnect continue to develop. Ahead of this period of simplification, the Firm has issued new medium-term (2027) targets for remaining businesses, John Crane and Flextek - targeted Group annual organic sales growth is upgraded from 4-6% to 5-7%, EPS growth 7-10% to 10%, operating profit margin 18-20% to 21-23% and ROCE: 15-17% to 20%. We update our forecasts for latest trading; Neutral reiterated We update our forecasts to reflect recent trading, the outlook,...
Smiths Group has just released H1''25 results; key takeaways include... H1 Sales: H1 sales miss BBG Consensus expectations by -1%. Organically, sales grew by +9% in H1''25 (BBG Cons at +9%) and grew at an implied rate of +2.4% in Q2 (+15.8% in Q1). Divisionally: John Crane delivered organic sales miss of c.-300bps, while Flex-Tek in line and Detection and Interconnect beat expectations by c.+200bps and c.+800bps respectively. Orders: Order growth was described qualitatively in this release. We understand that orders were strong in Detection led by Safety and Security growth as well as in Flex-Tek. H1 Adjusted operating profit: H1 adjusted operating profit came in -2% below Consensus; while margin of 16.7% (41bps YoY) compared to BBG Cons of 16.9%. Divisionally: A big beat in Interconnect (+210bps ahead) offset the underwhelming margins in the other divisions. Cyber Security Update: The cyber security incident at the end of January affected John Crane''s revenue and orders in January which continued into Q3, thus moderating full year growth expectations for this division. In FY25, GBP4-5m of costs are expected to be recognised in relation to this. Acquisitions: Smiths made two value-accretive acquisitions for GBP97m in H1 and announced today the bolt-on acquisition of Duc-Pac Corporation (US-based metal duct manufacturer) for GBP32m. Outlook: Smiths continues to expect to deliver FY25 organic revenue growth of +6-8% (BBG Cons at +7%) and operating profit margins to expand 40-60bps YoY (BBG Cons: c.+30bps YoY). The margin expansion is expected to be achieved through operating leverage and continued savings in 2H. Growth in H2''25 in John Crane is expected to improve compared to H1 supported by a robust order book and market demand. There have been upgrades to medium-term targets - organic sales growth: 4-6% to 5-7%, EPS growth: 7-10% to 10%, operating profit margin: 18-20% to 21-23% and ROCE: 15-17% to 20%. Conf Call: 8:00 am UKT. To access the call,...
Smiths has released strong results, which are in-line with expectations. Key highlights include: good organic growth, strong cash, guidance reaffirmed, a bolt-on acquisition, and new enhanced targets (which includes amongst other items >10% EPS growth pre-acquisition). Results summary H1’25 revenues grew by 6.7% (+9.1% organic) to £1,608m (consensus £1,602m), driven by organic growth across the Group. Divisionally, John Crane organic revenues grew 3.8%%, Flex-Tex 2.5%, Smiths Detection 15.3%, and Smiths Interconnect 26.8%. The operating profit margin expanded 40bps to 16.7%, giving adjusted operating profit of £269m (consensus £271m), an increase of 9.5% (+12.6% organic). EPS increased by 14.0% to 55.5p (consensus 54.5p) and a full year dividend of 14.23p (consensus 14.3p) is a 5.0% increase y-o-y. Cash conversion was strong at 94% and net debt was £299m (FY24 £213m), giving net debt/EBITDA of 0.5x. Acquisition Smiths has also announced the £32m bolt-on acquisition of Du-Pac, a US-based metal duct manufacturer for HVAC applications. Outlook FY25 guidance is reaffirmed. FY25 organic revenue growth is increased to 6-8% (previously 5-7%), and above its mediumterm organic revenue growth target. This is driven by a good performance across the Group, apart from US construction in Flex-Tek, and improved order book visibility. Operating profit margin guidance is unchanged at a 40-60 basis point expansion in FY25 (FY24 18.4%), supported by delivery of its ‘Acceleration Plan’. This guidance also incorporates the potential impact of US tariffs. New enhanced targets FutureSmiths (Smiths post Interconnect and Detection disposals) includes organic growth of 5-7% (from 4-6%, +M&A), EPS growth >10% (from 7-10%, +M&A), operating profit margin 21-23% (from 18-20%), RoCE >20% (from 15-17%), and cash conversion of c.100% (unchanged).
Smiths Group has announced its intention to separate This morning Smiths announced a portfolio reshuffle (Interconnect to be sold; Detection to be spun or sold) and increased its buyback by GBP350m to GBP500m. In more detail: . Interconnect: Smiths target a divestment announcement by the end of this calendar year. . Detection: To be separated either by UK demerger or sale following the sale of Interconnect . John Crane and Flex-Tek: To be retained . Share buy-back: Increased by GBP350m to GBP500m and to be completed by the end of calendar 2025. The incremental buyback equates to 5.5% of market cap. Scope for future buyback as proceeds from possible sale of Interconnect and Detection. . Conference call: A webcast conference call will begin at: 09:00 UKT to discuss the announcement BNPP Exane View: While a break-up makes a lot of sense - no synergies across the Group''s four platforms we note that the value that Smiths unlocks from a break-up naturally rests upon the value that Detection and Interconnect are able to fetch in a sale or spin scenario in the case of Detection. This week we expressed doubts that any value would be unlocked from a break-up as we had doubts regarding the multiples that Interconnect and Detection would fetch in a sale process - Breaking up? Easier said than done... (View full document-35p) More concretely we argued that Interconnect''s largest competitors tend to be very disciplined in the acquisitions they make (Amphenol''s acquired Carlisle''s Interconnect Technologies for 11.3x EV/EBITDA and CommScope''s Outdoor Wireless Networks and Distributed Antenna Systems for 7x EV/EBITDA). We would assume Interconnect would likely fetch a 12.5x EBIT exit multiple. Given Detection''s financial profile (high investment requirements, volatile cash and demand profile resulting in an estimated c7% operating FCF margin over the L5Y) we do not think trade buyers in adjacent markets would be interested and/or willing to pay 10x EBIT. Neither...
An activist investor has reignited debate over a proposed Smiths break-up and potential upside in such a scenario. We examine possible outcomes and conclude that while a breakup makes sense on paper it might at best produce only c10% upside at this point. We reiterate our Neutral rating. Will much value be unlocked in a break-up? We are not convinced Following a letter from US activist investor Engine Capital (per the FT, see here) investors are once again considering whether Smiths'' four divisions might be worth more separated. We don''t see significant upside at present, with challenges in finding suitable buyers for John Crane and Detection due to antitrust concerns. While John Crane might be spun successfully (perhaps at c14.5x EBIT) we think that Detection and Interconnect are unlikely to fetch rich multiples in a sale. In all, we only see c10% upside in a break-up today and expect any process would be lengthy and uncertain - it took c38 months to close the sale of Medical once separated (granted Covid delayed proceedings). Smiths has not just been ''underappreciated'' - we think other factors are at play Recent organic sales growth, while strong, was in part driven by inflationary pressures and off a lower volume base - it has been too early for investors with long memories to reward Smiths. The next three years will be the true test of Smith''s operating model. Further, margin development has been underwhelming, with limited operating leverage and disappointments in key divisions. For instance, 80% of Detection''s incremental revenue between FY''22-24 has been aftermarket driven yet its organic (ex-cost saving) drop-through has been negative on what should be mix rich growth. We advocate patience for investors who believe Smiths has changed We think the market will remain sceptical unless Smiths can convert its rich rates of organic sales growth into richer margin progression and improved ROCE and FCF margin. For now, we lack conviction...
CFO appointment Clare Scherrer has informed the Board of her decision to retire from Smiths. She will remain as CFO until 31 Jan and will continue to support a handover through H1’25 results until she leaves on 30 Apr. Julian Fagge, currently President of Smiths Interconnect, has been appointed as the Group's CFO and as an Executive Director to succeed Clare. Julian will take on his new responsibilities with effect from 1 Feb. Upgraded FY25 guidance FY25 organic revenue growth is increased to 6-8% (previously 5-7%), above its medium-term organic revenue growth target. This is driven by a good performance across the Group, with Smiths Detection and Smiths Interconnect stronger than expectations during Q2’25, and improved order book visibility. Operating profit margin guidance is unchanged at a 40-60 basis point expansion in FY25 (FY24 18.4%), supported by delivery of its ‘Acceleration Plan’. New guidance implies a c.3% upgrade to FY25 consensus EPS expectations. Next catalyst H1’25 results due on 25 March 2025.
What happened? Smiths this morning announced that its CFO had resigned and provided a trading update (organic sales growth guidance nudged up by 1ppt, margin guidance unchanged). On the CFO change, Smiths states that Clare Scherrer, the current CFO of Smiths Group plc, has announced her decision to retire from the company. She will remain in her role until January 31, 2025, and will assist in a smooth transition until her departure on April 30, 2025. The company has appointed Julian Fagge, currently President of Smiths Interconnect, as her successor, effective February 1, 2025. Julian joined Smiths in 2013 and has held various leadership roles, including Group Financial Controller and President of Flex-Tek. Alongside Clare, another notable change is Bernard Cicut, President of John Crane, who is also retiring. Bernard will be succeeded by Ruben Alvarez, a 27-year veteran of John Crane who is currently Vice President of Portfolios and Customer Operations. In regards to trading, we note that Smiths has upgraded its guidance for full-year organic revenue growth to 6-8%, up from the previous 5-7% guidance (Consensus sits at 7%). Smiths states that this is due to strong performance across the business, particularly in Smiths Detection and Smiths Interconnect during Q2''25. The company''s full-year order book visibility has also improved. The operating profit margin guidance remains unchanged, with a 40-60 basis point expansion expected in FY2025. BNPP Exane View: Clare stepping down as CFO comes as a slight surprise and given, she was fairly well regarded by the financial community should weigh on sentiment slightly. That said, her replacement, Julian Fagge, has a wealth of experience with Smiths in both a financial and operational capacity, which would make him a natural successor. At the same time, the second upgrade to organic revenue growth guidance (even if only moved up, such that the mid-point is in line with current Consensus expectations) is...
Smiths has released a strong Q1 trading update, ahead of its AGM later today. The key highlights include strong organic growth, upgrading FY25 growth and margin guidance, buyback increased. Current trading Q1 Group revenues grew organically by 15.8% (+13.1% when adjusted for extra trading days and vs a Q1’24 comparator of +3.5%) driven by strong growth in Detection, John Crane and Flex-Tek aerospace, and Interconnect semi-test activity. Its Acceleration Plan to improve operating efficiencies across the Group is progressing well. Buyback The Group is resuming its share buyback by initiating the second tranche of its previously announced programme. Given its strong balance sheet and expected good cashflow, the Board is increasing the total amount of the programme from £100m to £150m. The first tranche of £50m was completed in Sept, and the second tranche, now totaling £100m, is expected to complete by the end of its FY25. Outlook Given the strong start to the year and a record order book and expected mix, management now expects FY25 organic revenue growth of 5-7% (from the 4-6% original guidance) and a 40-60bps operating margin expansion in FY25 (FY24 was 16.8%). Note: INVe FY25E organic growth is 5.3% (consensus 5.5%) and margin 17.4% (consensus 17.3%). Therefore, there appears to be potential upwards pressure on consensus forecasts, even if the margin comes back a little. H1’25 results are scheduled for 25 March 2025.
Smiths has just released its Q1 trading update, key takes: . Sales: Organic growth of 15.8% YoY in Q1 (prior year comp at 3.5%) and is running strongly ahead of H1 Cons. expectations (+5.6%). Smiths notes that three extra trading days acted to contribute 2.7% to growth, however, even if one adjusts for this organic sales growth of 13.1% in the period still looks very rich. . Divisionally, John Crane delivered ''HSD'' organic revenue growth which is supportive of Cons. estimates. Detection revenues grew DD with growth ahead of H2 levels (i.e, mid-teens) which is encouraging. Interconnect delivered 30% organic sales growth driven by a recovery in Semi markets which has taken revenue above Q1''23 levels, which should be taken very well. Flex-Tek''s grew LSD, which is OK and relatively in line with H1 expectations. . Order colour: John Crane was noted to have delivered ''strong'' order growth which should reassure investors given there were some concerns around likely development following the removal of order growth disclosure at the last set of results. Interconnect''s Semi orders were also noted to have grown well. Detection, as we understand it, is also still delivering strong order growth. . FY''25 outlook: Slightly upgraded. Smiths now expects organic revenue growth of 5-7% (previously 4-6%; Cons at 6%) for adjusted operating profit margins to expand by 40-60bps YoY (Cons +50bps YoY) where previously it expected margin to ''expand'' YoY (which we had previously interpreted to mean c+30ps). Smiths, also cautions that organic sales growth in H1 will be heavily weighted towards Q1 and hence naturally cautions against extrapolating the very strong Q1 organic sales growth. . Buyback: Smiths have upsized (from GBP100m to GBP150m) and restarted its buyback which it had paused at the last set of results given that it is no longer pursuing a ''medium-sized'' acquisition opportunity. . Conference call: Smiths does not host conference calls for trading updates. ...
H2 profit missed expectations; FY''25 guidance also a little underwhelming relative to Cons. H2 sales came in slightly below expectations (-1%) driven by a slight disappointment in John Crane, where H2 organic sales growth missed Cons. expectations by c.200bps. The topline miss at John Crane in combination with less favourable mix (more system sales) weighed on profitability with Group adjusted operating profit missing expectations by c3% in H2''24. Moreover, the miss looks a little more underwhelming when considering that SES benefits for H2 came in GBP3m ahead of Smiths earlier guidance. In terms of guidance, Smiths is guiding to FY''25 organic sales growth that is consistent with its medium-term targets (4-6%; Cons at 6%) and for slight margin expansion (Cons +70bps YoY). We expect Cons to model organic sales growth of c5% and margin expansion of c30bps (similar to FY''24) translating to a c4-5% cut to underlying FY''25 forecasts. Assessing the risk to guidance is made a little harder as Smiths stopped providing quantitative details on order intake; the reduced disclosure has also likely weighed on sentiment (shares -5%). Large new restructuring programme announced; larger deals in the pipeline? Smiths also announced a new restructuring programme that will yield cGBP30-35m of benefits at a cost of GBP60m (taken below the line). While it is positive that Smiths can drive further efficiencies, the fact that it is not adjusting its mid-term aspirations in light of these actions is less attractive. It gives the impression that more action is needed to arrive to pre-existing targets. Smiths announced two small deals, for a combined EV of up to GBP110m at an implied c8x EBITDA multiple, with a combined EBITDA margin of c36%. On the conference call, in response to a question on capital allocation, the CFO noted that its pipeline was promising and was one of the reasons it was not launching the second tranche of its buyback. Given the second tranche is small and...
Smiths Group''s FY''24 conf call has just concluded; key takeaways include... Order trends: Despite previously disclosing order growth for Detection and John Crane for as far back as H1 19 and as most recently as H1 24, Smiths did not want to provide specific disclosure this time around and steered away from doing so when questioned on the call. Instead, it noted that order book levels at John Crane, Detection and Flex-Tek were at very healthy levels and noted that orders had grown strongly across all three division in the year. Further, Interconnect''s orders have continued to show QoQ grow. However, what is not clear to us is how orders specifically developed in H2''24, particularly at Smiths largest divisions - John Crane and Detection. The lack of colour naturally leads some investors to fear that the slowdown in order growth in John Crane and Detection may have been steep. Strategy: Smiths has launched another large restructuring programme; the benefits of the programme will largely flow through in FY''27 with a small portion to come in FY''26 (likely c25%). The costs associated with the programme will be taken below the line and will provide ammunition for those that are more cautious to question the quality of Smiths'' headline profit in the years to come. Moreover, the fact that Smiths is not increasing its mid-term margin, or growth targets if the savings are to be reinvested, has meant that the plan has underwhelmed investors. Essentially, on face value it reads as if Smiths is investing more to arrive at the same destination. Capital allocation: Net debt to EBITDA for Smiths was 0.3x at the end of FY''24. After taken into consideration the two small bolt-on announced, this is more like 0.4x on a PF. Despite this Smiths noted on the conference call that it would be not yet be initiating the second tranche of its buyback (only cGBP50m). This second tranche if executed would only increase leverage by c.0.1x. As such, the move by Smiths...
Smiths has released in-line FY24 results. Key highlights include: continued organic growth and margin expansion and this is expected to continue for FY25, plus two acquisitions for up to £110m. Results summary FY24 group revenues grew by 3.1% (+5.4% organic) to £3,132m (consensus £3,149m / INVe £3,155m), driven by strong growth in John Crane and Detection offsetting Flex-Tek Interconnect. Divisionally, John Crane organic revenues grew 9.8% and Smiths Detection +11.1%; Flex-Tex -0.8% and Smiths Interconnect -6.5%, but both divisions had an improved H2 performance and good order book growth. The adjusted operating profit margin expanded 30bps to 16.8% giving adjusted operating profit of £526m (consensus £535m / INVe £537m), an increase of 5.0% (+7.1% organic). EPS increased by 8.3% to 105.5p (consensus 104.6p / INVe 103.9p) and a full year dividend of 43.75p (consensus 44.1p / INVe 44.0p) is a +5.2% increase y-o-y. Net debt was £213m (FY23 £387m), giving a net debt/EBITDA of 0.3x. Strong cash conversion of 97%. ROCE increased by 70bps to 16.4%. Acquisitions Smiths also announces two North American acquisitions, Modular Metal Fabricators and Wattco, for a combined purchase price of up to £110m. These two companies will be integrated respectively into the Heating, Ventilation & Air Conditioning (HVAC) and electrical heating solutions platforms within Smiths Group's Flex-Tek business. A combined deal multiple of c.8x trailing 12 months EBITDA looks attractive given both companies are accretive to Flex-Tek's operating margin. Outlook Management expects FY25 organic revenue growth of 4-6% and continued margin expansion (exactly the same as its medium-term targets), underpinned by good orderbook visibility in John Crane and Detection. It is also launching a Groupwide Acceleration Plan to enhance profitability and productivity, for one-off costs totalling £60-65m in FY25 and FY26 for £30-35m of annualised benefits in FY27.
Smiths Group has just released FY''24 results; key takeaways for us include... H2 sales come in roughly in line with Consensus expectations . H2 Sales of GBP1,625m came in roughly in line with Consensus expectations (-1%). Organically sales grew by 6.8% in H2''24 (Cons at 6.6%) and grew at an implied rate of ~6% in Q4. . Divisionally: John Crane''s sales disappointed, coming in 5% light of Cons expectations (200bps miss organically) as General Industrial AM sales declined harshly (-9% in H2''24). Detection delivered a beat to somewhat offset (good execution on backlog) while Flex-Tek came in slightly ahead (strong Aero). Interconnect was broadly inline. . Order colour: Smiths is now omitting order growth details. Instead, it now talks qualitatively around growth, describing Detection, John Crane and Flex-Tek Aero as seeing strong growth in the year. We understand that John Cranes'' orders also grew in H2''24. H2 adjusted operating profit is 3% below expectations . Adjusted operating profit: H2 adjusted operating profit of GBP280m came in 3% below Consensus expectations as margins missed by 30bps in H2''24. Considering that SES benefits contributed GBP23m in FY''24 (GBP20m guided to and cGBP3m of incremental benefit in H2 v expectations) the margin miss is sightly underwhelming. . Divisionally: A margin miss at John Crane (60bps) and Interconnect (-50bps) drove the Group margin miss. Mix (perhaps the sharp decline General Industrial AM sales in H2) and higher levels of investment were noted to have weighed on the margin. FY''25 outlook implies underlying expectations may be trimmed slightly for FY''25 . Outlook: Smiths guides to organic sales growth that is consistent with its 4-6% mid-term ambition (Cons +6%) and margin expansion (Cons +60bps YoY). . Implications for fiscal 2025 Cons: We think Consensus may lower organic sales growth expectations by c1% while trimming margin expectations by c30bps (essentially modelling a similar step up in the margin as was...
A strong update highlighting strong organic growth, FY24 guidance reaffirmed Trading summary Q3 revenues grew 7.7% organically giving growth year-to-date of 5.2%; this was versus a record nine-month FY23 comparator of 13.4% organic growth. Note that Q3’24 benefited from four extra trading days and adjusting for this, organic revenue growth on a comparable basis was +6.1% (YTD 4.6%). This strong performance was driven by John Crane, Smiths Detection and Flex-Tek aerospace, with Flex-Tek construction and Smiths Interconnect gradually improving. Outlook summary Given year-to-date trading and a strong order book, management reaffirms its FY24 guidance for full-year organic revenue growth of 4-6%, with continued margin expansion. Next catalyst: H1 results due on 24 September 2024.
We see continuity in the group’s strategic direction under new CEO, Roland Carter, given his 30+ years tenure at Smiths and his most recent position as President of Smiths Detection. We see the group remaining on track to meet the 4-6% organic revenue growth guidance for FY24, underpinned by good visibility from the record orderbook at Detection and good fundamentals at John Crane. The launch of a new £100m buyback programme is further evidence of good cash generation prospects as well as mgmt. prioritising return of excess cash to shareholders. With the shares at a 10.3x CY24E EV/EBIT vs 13.5x historic multiple, we see c.30% upside to our new TP of 2100p (from 2150p). We maintain our BUY rating.
Smiths has released positive H1’24 results. Key points include: continued organic growth against tough comparators, FY24 guidance unchanged, CEO departure, and £100m share buyback. Results summary H1’24 group revenues grew by 0.7% (+3.9% organic) to £1,507m (consensus £1,508m) driven by strong growth in John Crane. Divisionally, John Crane organic revenues grew 12.7% (orders up 10.9%), Smiths Detection +8.9% (orders up 38.2%), Flex-Tex -4.7%, and Smiths Interconnect -13.7%, although the two latter divisions had an improved Q2 performance and double-digit order book growth. The adjusted operating profit margin expanded 20bps to 16.3% giving adjusted operating profit of £246m (consensus £248m), an increase of 2.1% (+5.3% organic). EPS increased by 4.5% y-o-y to 48.7p (cons 48.9p) and an interim dividend of 13.55p (cons 13.7p) is a +5% increase y-o-y. Net debt was £505m (FY23 £387m), giving a net debt/EBITDA of 0.9x. Strong cash conversion of 89%, up 26% y-o-y, due to working capital improvements. ROCE increased by 50bps to 15.7% Outlook Strong orderbooks in John Crane and Smiths Detection and new product pipeline provide management confidence in delivering FY24 growth within the medium-term target range of 4-6% and continued margin expansion; this is despite record FY23 comparators, a moderating pricing environment and softer market conditions in parts of Flex-Tek and Smiths Interconnect. Other CEO departure: Paul is stepping down to move back to the US and take on a new role as chief executive of a US public company. Roland Carter (Smiths Detection CEO) will become the Smiths Group CEO. Next catalyst: A Q3 trading update on 21 May
Smiths Group hosted an on-site Deep Dive/CMD event solely focused on John Crane, its largest division. While there were no changes to financial guidance, we took away the following points that re-affirmed our positive investment thesis: 1.Resilience of John Crane’s high margins, 2. The energy transition is an opportunity for John Crane, 3. Smiths has the capacity to invest to keep or grow share as energy markets transition. 4. Overall, confidence in our John Crane estimates was reinforced by the upbeat demand outlook as detailed in the management presentations and as supported by the current strong orderbook. BUY, 2150p TP.
Trading Key highlights: Continued organic growth and positive outlook in-line with expectations. Current trading: Q1 organic revenue growth of 3.5% (vs. a tough comparator – Q1’23 which grew at 13.2%). John Crane and Detection grew while Flex-Tek and Interconnect saw lower y-o-y growth as expected. Outlook Unchanged outlook: Strong orderbooks in John Crane and Smiths Detection and new product pipeline provide management confidence in delivering FY24 growth within the medium-term target range of 4-6%, despite record FY23 comparators, a moderating pricing environment and softer market conditions in parts of Flex-Tek and Smiths Interconnect. Upcoming events AGM today: Sir George Buckley will retire as Chairman and replaced by Steve Williams. CME on 30 November: Focus on the John Crane business.
Estimate changes: Smiths Group (SMIN.L, Price 1570p - Buy - TP: 2000p)
Smiths has released a positive Q3 trading update, highlighting continued strong growth driven across the Group and FY23 guidance increased again. Trading – strong Q3 Q3 growth continued at high levels, with 9M organic revenue growth now at 13.4% y-o-y, compared to +13.5% in H1, driven by both volume and pricing with strong demand in most of its end markets. Divisionally in Q3, John Crane is seeing strong conversion of its orderbook to revenue, Smiths Detection had a notably strong quarter, Flex-Tex saw a recovery in aerospace offset weakness in US construction, and Smiths Interconnect declined y-o-y reflecting some demand weakness Outlook – FY guidance increased Given current trading management is raising FY23 guidance to around 10% organic revenue growth (guidance was 8% on 24 Mar, 7% on 18 Jan and originally set at 4-4.5% with FY22 results on 23 Sep 2022), while moderate margin improvement guidance is maintained (FY22 margin was 16.3%). This suggests further upward pressure to consensus forecasts. The £742m share buyback programme is near completion.
H1''23 results came in ahead of expectations On balance, Group orders appear to be growing well - 14% at John Crane; DD at Flex-Tek Aero; we think LSD at Detection; Interconnect was the only business to have seen its orders decline. Group sales in H1 came in 6% ahead of Visible Alpha Cons and grew at an organic rate of ~15% (Cons at 11%) and at an implied rate of ~15% in Q2. Pricing accounted for around half the growth (~7%). While all divisions exceeded expectations, the strength in John Crane (4% ahead of Cons.) and Flex-Tek (10% ahead of Cons.) stood out particularly. H1 adjusted operating profit came in 5% ahead of Cons; margin missed expectations modestly (20bps). Divisionally, a strong John Crane margin (+150bps ahead) almost made up for the disappointment across all other divisions. Flex-Tek''s margin (-110bps miss) was underwhelming in the context of the strong organic sales growth it delivered (due to poorer mix and higher investments). Smiths guides to ''at least 8%'' organic sales growth and modest margin expansion Smiths now guides to ''at least 8% organic sales growth'' (at least 7% previously) and ''modest margin improvement'' (pre-results Cons. modelled 8% organic sales growth and margin +40bps YoY). Guidance implies that Smiths expects to deliver at least 3% organic sales growth in H2 and for margins to expand by 110bps YoY (assuming FY''23 margin is up +40bps YoY, as per Cons). Where does risk reside? While organic sales growth in Flex-Tek was strong in H1, Smiths is unsurprisingly talking of a slower start in its Construction markets in H2 (~50% US resi). Volumes and pricing have started to deteriorate. Naturally, how fast pricing unravels is a key risk. Elsewhere, Detection''s growth is likely to be OE led, meaning mix will remain challenging in the near-term. We update our numbers for latest trading; our TP moves to 1750p (from 1725p) Our headline profit estimates move up by 3% for FY''23 but remain largely unchanged for FY''24....
Smiths has released strong H1’23 results; key highlights include record growth driven by volume/pricing/new products, 63% cash conversion reflects higher working capital plus seasonal patterns, FY23 guidance increased again. Results summary H1 group revenues grew by 25.6% (+13.5% organic) to £1,497m, driven by all divisions and regions. Divisionally; John Crane revenues grew 24.6% to £519m (+14.6% organic), Detection by 24.8% to £390m (+14.0% organic), Flex-Tek by +33.2% to £395m (+17.0% organic) and Interconnect by +16.2% to £193m (+3.3% organic). The adjusted operating profit margin expanded by 20bps to 16.1% giving adjusted operating profit of £241m, an increase of 27.4% (+12.7% organic). EPS increased by 52.1% to 46.6p and an interim dividend of 12.9p is a 5% increase y-o-y. Net debt was £429m (FY22 £150.0m), which is a net debt/EBITDA ratio of 0.8x. ROCE expanded by 120bps to 15.2%. Outlook Management is raising FY23 guidance to at least 8% organic revenue growth (this was guided at 7% on 18 January 2023 and originally set at 4-4.5% with FY22 results on 23 September 2022), whilst maintaining its ‘moderate margin improvement’ guidance. This guidance suggests modest upward pressure to consensus forecasts. The £742m share buyback programme is now c90% complete with remainder expected within FY23.
Backlogs have been built across the sector...a normalisation should ensue Strong levels of apparent demand coupled with supply chain constraints have led to significant backlog builds at some companies. With supply chains now easing, a normalisation in backlog lengths should ensue. While this dynamic is well understood, to our knowledge it has not been formalised well. Further, given that the Street has struggled with modelling backlog dynamics at companies where disclosure is good (Siemens upgrades on this dynamic are notable), the scope for Consensus to be caught offside is greater when disclosure by companies is poorer. Enter UK Cap Goods. To this end, we have worked hard to i) estimate backlogs today where they are not disclosed and ii) assess which companies offer the greatest risk reward across UK Cap Goods. But isn''t a backlog normalisation a reason to turn bearish?... depends on the starting point Is a normalisation of backlogs a reason to turn bearish? We conclude it is not, if Consensus forecasts for outer years are not threatened and instead (more likely) need to be revised higher. This risk-reward only exists today as Consensus for some companies does not model any normalisation in backlogs to begin with. As companies report results over the next six months, this opportunity will in part disappear. Still, other opportunities may present themselves. Some companies might be punished on order misses that do not justify future earnings cuts. An understanding of backlogs today and how they develop may allow for a lucrative, but counter-intuitive, ''buy the order miss trade''. Weir, Spectris and Rotork are the key winners across UK Cap Goods Weir Group (+), Rotork (+) and Spectris (+) are the winners. Backlogs are so elevated, and Consensus revenue estimates so detached, that we think mid teen ppt declines in order volumes are needed to threaten Consensus revenue estimates for FY''23/FY''24. We assign a low probability to such a bearish...
SMIN IMI SXS WEIR ROR
Smiths has released a strong Q1 trading update. Key highlights include strong organic growth, and maintained FY guidance appears underpinned. Current trading Q1 (Jul y/e) organic revenue was up 13.2% driven by organic growth across all divisions. We estimate that this figure would have been high single-digit if not for a large Detection order delivery. Regardless, this is still a very strong Q1 performance for Smiths. John Crane posted steady growth despite supplier shortages impacting revenue conversions and order growth remains strong. Detection posted strong growth, as expected given timing of order deliveries. Flex-Tek delivered strong growth driven by aerospace and construction. Interconnect generated solid growth driven by semiconductor. We assume that margins are running on track with expectations. The £742m share buyback programme (announced in November 2021) is on track with £617m of purchases so far; at the current run-rate and share price, the programme is expected to complete in early calendar 2023. Outlook There is strong demand in most of Smiths end markets and management is executing on its strategy while navigating supply chain and cost inflation. Despite external uncertainties, FY23 guidance of 4-4.5% organic growth with moderate margin improvement is reiterated, underpinned by a strong start to its FY23. We expect growth to moderate in some key markets within Flex-Tek and Interconnect, consistent with management commentary and Detection growth will normalise through the year. We assume that John Crane continues to deliver growth.
Smiths delivered a decent H2 performance Smiths delivered a decent H2 relative to Consensus expectations. Revenue came in 2% ahead of Consensus, growing at an organic rate of 4% (Consensus at 3%) while headline profit came in line with the Consensus expectations, as margin missed by a modest 40bps. Divisionally, strength was once more driven by Flex-Tek and Interconnect (where profit beat by 9/23% respectively) but was held back by John Crane and Detection (where profit missed by 5/24% respectively) as supply chain disruptions and a step up in RandD weighed on profitability. Smiths'' guidance suggests Consensus FY''23 expectations are too modest The focus of the day was on Smiths'' FY''23 guidance. Despite the macro uncertainty, Smiths encouragingly guides to organic sales growth falling between a narrow range of 4.0-4.5% (Cons. at 3.0%) and moderate margin expansion. Solid order intake development across John Crane and Detection appears to provide some support for the organic sales growth while a new cost saving programme should support profitability (GBP12.5-15.0m of cost savings are expected to be delivered in FY''23). In all, we believe guidance supports underlying consensus upgrades of 2-3% (5% when FX driven tailwinds are reflected). Is there any risk to guidance? During the conference call Smiths did not really talk down development across any businesses. Flex-Tek despite its U.S. residential exposure (~40% of the division) and Interconnect despite its Semi exposure are both expected to grow alongside John Crane and Detection. Smiths noted that it had not seen any signs of demand slowing down for these businesses yet. While we are very confident in Flex-Tek and Interconnect delivering good growth in H1, we are slightly more cautious on their ability to grow in H2; we believe Flex-Tek and Interconnect should see sales soften. We update our numbers for trading; our TP remains unchanged We update numbers for latest trading and FX. Recent...
Smiths has delivered good results; key highlights include: 3.8% organic growth – the highest rate in nearly a decade, 80bps margin expansion to 16.3%, and good demand reflected in order book growth of 11%; management guides to 4-4.5% FY23 organic growth. Results summary FY22 revenues increased by 6.7% (+3.8% organic) to £2,566m (INVe £2,511m) driven by strong growth across the Group (except Detection, as expected). The adjusted operating margin expanded 80bps to 16.3% driving operating profit growth of 12.0% (+1.7 % organic) to £417m (INVe £420m / consensus £416m). EPS grew by 17.8% to 69.8p and the dividend has increased by 5.0% y-o-y to 39.6p. Cash conversion was 80%, a good result given working capital investment, and ROCE expanded by 30bps to 14.2%. Outlook There is strong demand in most of Smiths’ end markets and management is executing on its strategy while navigating supply chain and cost inflation. New product launches remain on schedule which should help to underpin growth. Despite external uncertainties, FY23 guidance of 4-4.5% organic growth with moderate margin improvement is given. Investment case There are visible improvements in some of its divisions and the separation of Smiths Medical should create value. The target of 4-6% organic revenue growth appears achievable and provides upside to market expectations if achieved. We believe the positive investment case remains intact, given that (1) the Medical separation realises value; (2) trading is improving across the Group; and (3) John Crane (a high margin and aftermarket-driven business) is nearly half of group profits with clear energy transition growth drivers.
Flex-Tek and Interconnect drove growth once more; orders at John Crane remain strong Group organic sales growth in the nine months to 30 April was 4.2%, which implies that organic sales growth in Q3 was c6%. Divisionally, strength was once more led by Flex-Tek, where growth accelerated, and Interconnect. John Crane, which grew modestly and Detection, where sales are still depressed (owing to weakness in its Aviation OE business) acted as drags on Group organic sales growth. Encouragingly, orders were described as growing strongly in John Crane (we believe 10%) and Detection was able to deliver continued growth too. Profitability at John Crane appears to be under greater pressure than Consensus assumes While Smiths offered few details regarding profitability, it did mention that supply chain disruptions (which impacted revenue growth) and elevated input costs weighed on John Crane''s margin. In our view, this suggests that margin at John Crane is lower YoY, perhaps by c.100bps in contrast to Consensus expectations which models a +100bps YoY margin expansion currently. However, with order growth remaining strong and supply chain headwinds hopefully easing, we would expect John Crane''s margin to recover in FY''23 (indeed our FY''23 margin remains largely unchanged). However, strength elsewhere (Flex-Tek, Interconnect) should act to offset Once more, a better-than-expected performance at Flex-Tek and Interconnect - where we now expect double digit organic revenue growth in H2 - should make up for the weaker performance at John Crane. As such, we would expect minimal changes to Consensus Group expectations at this stage. Looking further out, we look forward to hearing about the progress Smiths has made in respect to its strategy and how this might evolve following the final refresh in its leadership team (Clare Scherrer, new CFO; Bernard Cicut, new president of John Crane). An FX tailwind offsets the underlying cuts we make, TP is unchanged...
Smiths has released a positive Q3 update highlighting good trading and FY22 organic revenue growth guidance of 3% is confirmed. Current trading 9M organic revenue growth was 4.2% compared to 3.4% in H1 (5.7% in Q3) driven by good sales momentum in John Crane, Flex-Tek and Interconnect. Detection’s aviation exposure continues to reduce growth currently. We assume that Group margins are running on track with expectations. The £742m share buyback programme (announced in November 2021) is on track with c£310m of purchases so far; at the current run-rate and share price, the programme is expected to complete in early calendar 2023. Outlook 9M trading gives management confidence to maintain its FY22 organic revenue growth guidance of 3% (note: its medium-term target is 4-6%). This is despite supply chain challenges, economic uncertainties and a tough Q4 comparator. Investment case & valuation There are visible improvements in some of its divisions and the separation of Smiths Medical, now complete, should create value. The recent Capital Markets event highlighted an ambitious target of 4-6% organic revenue growth, which we see as positive, and as providing good upside to market expectations if achieved. We believe the investment case remains intact given that (1) the Medical separation should realise value; (2) trading is improving across the Group; and (3) John Crane (a high margin and aftermarket-driven business) is nearly half of group profits with clear energy transition growth drivers. The shares are trading on a FY23E PE of 18.2x, EV/EBITDA of 9.4x, and a dividend yield of 2.9%. Next catalyst – Smiths will publish its FY22 results on 23 September.
Smiths announced today a new CFO and other executive leadership appointments. New CFO Clare Scherrer has been appointed CFO with effect from 29 April 2022, and John Shipsey will step down from that date but will stay on until the July financial year-end to ensure a smooth handover. Clare previously worked for Goldman Sachs, where most recently she was Co-Head of the Global Industrials business, and had advised on the sale of Smiths Medical. New head of John Crane Smiths also announced the appointment of Bernard Cicut as President of John Crane, effective 18 April 2022, replacing Jean Vernet. Bernard joins from 3M, where most recently he was President of its $4.5bn Personal Safety division. New head of HR Vera Kirikova has been appointed Chief People Officer, effective 18 April 2022. Vera joins from Rio Tinto where she was Chief People Officer from 2016-2021. Strategy head promoted to executive committee Smiths also announces that the Group Head of Strategy will become an Executive Committee role, and consequently Diana Houghton, who has served in the role since 2019, will join the Executive Committee with immediate effect. Our view We believe that this is a natural change of guard by new(ish) CEO Paul Keel to enable the execution of the strategy set out at its CMD in November (click here to see our note and comments on this).
Key highlights & outlook A 3% operating profit beat, good cost management has driven a 150bps margin improvement, and strong demand in its key end markets gives maintained FY22 guidance despite external headwinds. 25% of its £742m share buyback is completed. There is strong demand in most of Smiths’ end markets, although management expects a more challenging aviation OE market in the near-term. Management is executing on its strategy and navigating supply chain and cost inflation. New product launches remain on schedule which should help to underpin growth. Despite external uncertainties, guidance for 3% organic revenue growth in FY22 is maintained. Results summary H1’22 revenues increased by 3.7% (+3.4% underlying) to £1,192m (consensus £1,167m) driven by strong growth across the Group (except Detection as expected). The adjusted operating margin expanded 150bps to 15.9%, driving operating profit growth of 13.9% (+11.1% at cc) to £189m (consensus £184m). EPS grew by 17.7% to 30.6p. The interim dividend has increased by 5.0% y-o-y to 12.3p (consensus 12.0p). Cash conversion was 93% and the Group has moved to a net cash position of £262m given the disposal of Smiths Medical. ROCE expanded 370bps to 14.0%. Investment case & valuation There are visible improvements in some of its divisions and the separation of Smiths Medical, now complete, should create value. The recent Capital Markets event highlighted an ambitious target of 4-6% organic revenue growth, which we see as positive, and as providing good upside to market expectations if achieved. We believe the investment case remains intact given that (1) the Medical separation should realise value; (2) trading is improving across the Group; and (3) John Crane (a high margin and aftermarket driven business) is nearly half of group profits with clear energy transition growth drivers. The shares are trading on a FY22E PE of 21.1x and EV/EBITDA of 10.0x, falling to 18.3x and 9.4x respectively in FY23E.
Completion of Smiths Medical sale to ICU As per the announcement on 8 September 2021 the transaction represented an EV of $2.7bn for Smiths Medical, including approximately $1.85bn in immediate cash proceeds and $0.5bn in ICU shares. The aggregate EV could increase to over $3.0bn if ICU's share price averages $300 or more for any 30-day period during the next three years, or for any 45-day period in the next four years (note: current ICU share price is $231). This will trigger additional cash consideration of $0.1bn, plus a $0.25bn increase in the value of ICU shares. Use of proceeds reminder Smiths previously announced that it intends to return c.55% of the initial cash proceeds (equating to $1bn or £742m) via a share buyback programme (note: all shares purchased will be cancelled). Share buybacks started on 19 November 2021 and the Group has purchased 4.2m shares to date, for a total consideration of £64.3m. The balance of the initial cash proceeds will be used to accelerate value creative growth opportunities and further reinforce Smiths' strong balance sheet. Please see our notes from Smiths CME in November 2021 (click here) where we highlight the Group’s medium-term targets under new(ish) CEO, Paul Keel.
CME Smiths is hosting a hybrid Capital Markets Event from today, which will highlight the Group's plan for accelerating growth via its ‘Smiths Value Engine’. In particular, the Group will discuss its route to its newly defined medium-term financial targets. This afternoon (17 November), pre-recorded video presentations are available on its website while tomorrow (18 November), from 3pm, there will be an in-person product expo and live Q&A with the CEO and the senior management team. Medium-term targets New(ish) CEO, Paul Keel, today has set out the medium-term targets for the Group. These include: 4-6% organic revenue growth (with additional M&A upside), 7-10% EPS growth (plus M&A upside), a 15-17% ROCE, 18-20% operating profit margins, and operating cash conversion of 100%+. We believe that these are positive targets and provide good upside to market expectations if achieved – we currently estimate 3-4% organic revenue growth over the FY22-FY24E forecast horizon, and an operating profit margin of 17.7% by FY24E (note: FY21A was 15.5%). Sale of Smiths Medical The proposed sale of Smiths Medical to ICU, for an EV of c$2.7bn, received 99.97% votes for approval at the GM today. The Board expects that, subject to the satisfaction and/or waiver of certain regulatory and antitrust conditions, completion of the ICU Transaction is expected to occur in early 2022. £737m share buyback programme Also at the GM today, the £737m share buyback programme received 95.75% votes for approval. We expect share buybacks to commence from Friday 19 November.
Unsurprisingly, Detection acted as a drag on growth; trends elsewhere are encouraging Underlying revenue grew by 1% in Q1''22 and on a two-year stack stood at -1% (-4% in H2''21). Whilst organic sales growth may appear underwhelming, we''d note that the Q2 comp is a lot easier (we estimate c.-7% compared to -2% in Q1) and so we expect organic sales growth momentum to continue to improve from here. Divisionally, John Crane''s OE and AM businesses are both growing, with its orderbook showing good progression too. Flex-Tek delivered good growth as its Aerospace business continued to recover. Detection was the only division that struggled in Q1. Given the group delivered 1% growth and all other divisions grew, we believe that Detection delivered close to double digit organic sales declines in Q1. However, we must remember that this time last year Detection''s Aviation sales were still growing (as it executed on its backlog), hence the comp was tough. In this context, the Q1 declines might not be so concerning. Further, we find it encouraging that AM activity is improving in the division and that its orders are growing once more. Medical deal progressing well; share buyback to commence imminently Smiths noted that the deal is progressing well and at a faster rate than it previously envisaged (in keeping with what ICU has recently said). As such, this gives it confidence to commence with its previously announced share buyback as early as the 19/11/21 (subject to shareholder approval). All eyes on the CMD next week Elsewhere, attention remains on the Group''s upcoming CMD (next week) where Smiths'' new CEO, Paul Keel, will present the Group''s new strategy which will revolve around how he expects to reinvigorate growth. Considering the undemanding valuation the shares currently trade at, we believe that a convincing strategy would be taken well. We update our forecasts for latest trading; our TP remains unchanged We update our forecasts for...
Key highlights Smiths has released an in-line trading update. Key highlights include: the Group remains in growth mode, Smiths Medical is progressing towards a faster than expected transaction completion, the £742m share buyback is due to start next week, and FY expectations are unchanged. Current trading and outlook Q1 revenues grew 1% on an underlying basis. All divisions grew apart from Detection (as expected - order delivery timing). Smiths has delivered two quarters of growth now and is well positioned as markets recover with good order book momentum. Despite continued economic uncertainties and supply chain challenges, management expects Group revenue growth to return to around pre-COVID levels during the year and further operational efficiency and good cash generation. Overall, management is confident in meeting its FY22 expectations of delivering underlying revenue growth for the Group of c.3%. The proposed sale of Smiths Medical to ICU, for an EV of c$2.7bn, is progressing well (expected to complete in H1 CY22) and, subject to shareholder approval due on 19 Nov, the group expects to commence the share buyback programme (note: the Board proposes to return 55% of initial net cash proceeds ($1.85bn), which equates to £742m). Investment case We believe the investment case remains positive, given that (1) Smiths Medical should realise value, (2) There are clear opportunities to further improve growth and returns of the Group, and (3) John Crane (a high margin and aftermarket driven business) is nearly half of group profits. The shares are trading on a FY22E PE of 14.1x and EV/EBITDA of 12.0x with a 2.8% dividend yield, falling to 13.3x, 11.3x, 3.0% respectively in FY23E. Next catalyst is a capital markets event on 17 and 18 November 2021.
H2''21 results met the Streets expectations... Considering that Smiths had recently commented that it expected to meet market expectations, we were not expecting FY''21 results to present many surprises. In some ways, this was the case. Sales only came in modestly ahead of consensus expectations and whilst headline EBIT beat by 7%, this was because restructuring plans progressed at a faster pace than Smiths had earlier envisaged allowing it to deliver savings ahead of time. Excluding this dynamic, we estimate that Smiths delivered an EBIT print that was roughly in line with the Street''s expectations. ...with encouraging details around trading at John Crane and Flex-Tek There were some encouraging details contained within the release - namely the better H2 growth at Flex-Tek and stabilisation at John Crane. John Crane delivered zero organic revenue growth with its AM business growing by 3% (also 3% on a two-year stack). Flex-Tek delivered c.12% organic revenue growth driven by its Industrial business (+17%) while its Aerospace business showed signs of recovering (+2% growth). These two divisions will be core in driving growth in ''22. As such, the better momentum displayed by both businesses in H2 should reassure investors. Kitchen sinking event avoided; attention now turns to the November CMD In terms of guidance, Smiths spoke of ''returning to historical levels of growth'', which we believe implies delivering c3% organic revenue growth in FY''22 and compares to Consensus expectations of 5%. Detection (30% of sales) was the driver behind the implied cut as the Street modelled organic revenue growth of 4% next year, where Smith''s hinted towards more stable development. However, we don''t expect this to trigger material revisions to consensus earnings and with the tail risk around the new CEO kitchen sinking failing to materialise, one can look forward to the next catalyst - November''s CMD. We tweak our FY''22 forecasts; our TP moves to...
Key highlights & outlook Revenues returned to growth in Q4’21, with margin improvement across all divisions – operating profit beat of 11% vs consensus (beat INVe by 5%), $2.7bn sale of Medical is now binding. A return to growth, with Smiths well positioned as markets recover with good order book momentum. Despite continued economic uncertainties and supply chain challenges, management expects Group revenue growth to return to around pre-COVID levels during the year and further operational efficiency and good cash generation. The proposed sale of Smiths Medical to ICU for $2.7bn (superior offer announced 8 Sep) is today announced as binding and expected to complete in H1 CY22. Note the Board proposes to return 55% of initial net cash proceeds, which is c.£737m, by way of share buyback. FY21 results FY revenues (ex-Medical) decreased by 6% (-2% underlying) to £2,406m (INVe £2,415m / consensus £2,394m). The adjusted operating margin expanded 270bps to 15.5% resulting in operating profit of £372m (INVe £353m / consensus £335m), up 14% (7% underlying). EPS increased by 10% to 93.1p and the dividend by 8% to 37.7p. Cash generation was strong and cash conversion was 125%. Investment case & valuation We believe the investment case remains positive, given that (1) Smiths Medical should realise value, (2) There are clear opportunities to further improve growth and returns of the Group, and (3) John Crane (a high margin and aftermarket driven business) is nearly half of group profits. On our forecasts, the shares are trading on a FY22E PE of 13.6x and EV/EBITDA of 12.3x, with a 3% dividend yield. Next catalyst is a capital markets event on 17-18 Nov.
After market close yesterday Smiths announced the proposed $2.3bn (£1.7bn) sale of Smiths Medical. We believe the deal value is below market expectations and it potentially lowers our SotP valuation by c7%. We initially estimate that there could be up to £800m of returns to shareholders. Investor and analyst call at 10am. Sale of Smiths Medical, key points: Proposed sale of Smiths Medical to Trulli Bidco (a wholly owned subsidiary of funds advised by TA Associates) at a value of $2.3bn (£1.7bn), plus an additional $0.2bn contingent on future performance. This proposal is superior to all other proposals received during the separation process (separation first announced on 14 November 2021, see timeline overleaf) and the Board considers it a better outcome for shareholders than a demerger. Smiths expects to receive net cash proceeds on completion of $1.8bn (£1.3bn), which will be used to “support investments in growth and enable a significant return of capital to shareholders”. Smiths will also receive a 30% equity interest in Trulli Topco (valued at $0.2bn), which will be the new holding company of Smiths Medical. Completion is expected by the end 2021, subject to shareholders and customary regulatory approvals. Our key observations: The deal value is below market expectations (INVe £2.38bn / consensus £2.2bn to 2.6bn), and at 10x EBITDA (31 January 2021 trailing 12 months) appears to be at a lowly valuation. We assume that there have been multiple offers, both by strategic and financial suitors, and we also need to further understand adjustments relating to balance sheet items and litigation etc. Introducing the sale value of £1.7bn would lower our SotP valuation by c7% to c.1675p (current TP 1800p), however we note that this is subject to change when incorporating returns, new net debt levels, FY21E results and latest peer-group multiples. Regarding the £1.3bn of estimated cash proceeds, we estimate that if management was to reduce FY22E net debt/EBITDA to 1x (adjusting for the loss of Smiths Medical cash contribution and including £500m from the sale proceeds), there would be up to £800m of potential returns to shareholders.
Smiths to ''separate'' from CEO and Medical Change at Smiths is afoot. There has been a sudden change in the Group''s CEO and in around eight weeks'' time the separation of Smiths Medical will have likely been completed. As the separation approaches, so investors increasingly question what the split-up entails, whether it will unlock value and if it''s enough of a reason to own the shares. Will this separation from Medical unlock value? Within this note, we examine the various Medical separation scenarios, including that of a possible sale of Medical; assessing the likelihood and implications of each case. We highlight that even under a cautious scenario (an independently listed Medical which trades poorly, with an implied EV of just GBP1.8bn) a separation can still unlock value for shareholders, given the low valuation the market currently implicitly assigns to Remainco (c.12x EV/EBIT22e). Furthermore, with our cautious case acting as a backstop and given the possibility that Medical could be acquired, which cannot be ruled out just yet, we see a compelling entry opportunity before us. Does the change in CEO derail the equity story? In our view the risk/ reward on the sudden change in CEO is positively skewed. The likelihood of a last-minute sale of Medical is now higher. Further, the fresh strategy the new CEO will now present could surprise positively. At the same time, an inflection of Smiths'' Sector-relative growth momentum presents a re-rating opportunity. Looking further out, we suggest that Smiths can cope with the energy transition, whilst a review of Detection''s pipeline leaves us more confident in regards to its outlook with PathSensors, offering a ''free option'' to unlocking further growth. Risk/ reward appears skewed firmly to the upside; we reiterate our Outperform rating Our bear case scenario points to low-single digit downside whilst an upside scenario where we assume a trade buyer for Medical, a quicker recovery of...
Smiths delivered a decent underlying H1 profit beat... H1 sales declined by 5% organically and came in in-line with Consensus expectations, whilst headline EBIT came in c.10% ahead. A large part of the EBIT beat was down to the phasing of expected restructuring costs, which are now expected to be H2 weighted (previously expected to be spread evenly through FY''21). Excluding this dynamic, we believe that the underlying EBIT beat was closer to c.3%. In terms of guidance, Smiths simply expressed its confidence in meeting market expectations (Consensus at GBP350mn for EBIT). Considering Consensus is yet to factor in a larger H2 FX headwind, we believe the message points towards small underlying EBIT upgrades. ...Whilst commentary from Management should reassure investors Management were able to talk confidently in regards to a sequential order recovery starting to play out at John Crane, whilst concerns around backlog depletion at Detection were allayed. Looking forward, more of the Detection story will start to revolve around the possible opportunity in biological threat detection markets and the difference the recent PathSensors acquisition can make. Whilst its revenue contribution is currently insignificant (GBP1mn in H1), the opportunity going forward could be material. Indeed with PathSensors Smiths have a product (Bioflash) that can detect COVID in the air - the CEO classified the market opportunity here as ''endless''. Is a Medical disposal still on the cards? Within the release, Smiths also reaffirmed its intention to ''separate'' (not necessarily spin) its Medical business by the end of FY''21. In our view, the lack of firm management commitment and detail in regards to a spin, could suggest that a sale of the division is still on the cards. We lift our target price to 1825p; re-rating catalysts on the not too distant horizon FX more than offsets the small underlying upgrades we put through for FY''21 and FY''22. Our TP however, rises...
Smiths has released positive interim results. Key highlights include: better than expected profitability, good cash generation and a relatively positive outlook statement. Smiths Medical is on track for separation. Interim results – highlights resilience Half-year (ex-Medical) revenues decreased by 7% (-5% underlying) to £1,150m (INVe / consensus £1,150m). The adjusted operating margin contracted 40bps to 14.6% resulting in operating profit of £166m, down 11% (-6% underlying). Group EPS fell by 9% to 42.9p. The dividend has increased by 6% to 11.7p. Cash conversion was 129% and net debt was £1,075m, representing a net debt/EBITDA ratio of 1.7x. Outlook – positive FY expectations intact Trends are improving and we expect this to continue in its second half with restructuring benefits helping improved profitability. Management is confident of meeting FY market expectations and its confidence underpins the dividend increase. Medical is still expected to be separated by its Q4’21 (Jul y/e). Investment case – recovery and Medical separation value There are visible improvements across the Group and the separation of Smiths Medical should create value. Clearly trading has been impacted by Covid-19, but it has shown resilience and the Medical separation has been delayed. On balance, we believe the investment case remains intact, given that (1) Smiths Medical should realise value, (2) the business has traded robustly given some of its medical and infrastructure critical products, and (3) John Crane (a high margin and aftermarket driven business) is nearly half of group profits. On our forecasts, the shares are trading on a FY22E PE of 14.9x and EV/EBITDA of 12.6x and provide a 3% dividend yield. There is a results presentation at 9am.
Smiths delivered a relatively disappointing H2''20... Smiths delivered an in-line top line performance, with organic sales contracting by just -4% in H2 despite the challenges that COVID presented. It''s worth highlighting that organic sales growth at the Group''s best asset, John Crane, declined by just -2% with the aftermarket proving to be resilient (flat YoY). Despite the decent topline print, headline EBIT disappointed. After stripping away restructuring costs (now taken above the line) and costs related to write-downs we find that Group headline EBIT missed (Visible Alpha) Consensus expectations by c.5% for FY''20 and 8% for H2''20; with all divisions disappointing. Whilst management noted (but did not quantify) that COVID expenses (freight, ''business continuity'' costs, etc.) were a burden, the implied 92% drop through on a -4% H2''20 organic revenue decline strikes as being particularly harsh. Indeed, within the UK Cap Goods complex it was one of the poorer prints that we have seen for calendar H1''20. ...with the outlook remaining almost as uncertain as it did a few months ago Looking forward it is clear to us that Smiths will have to navigate challenging end markets in FY''21. Detection will have to trade through depressed Commercial Aerospace markets, with Smiths acknowledging that there will likely be fewer tenders launched in the near-term, and what there is will continue to be hard fought; for us, this points to the potential for further OE pricing pressure. Meanwhile, John Crane''s OandG business faces structural issues of its own, as customers seek to fade their oil production over the long-term. Smiths appear to at least recognise this threat, and on the conference call emphasised the desire to look for growth in other end markets - Pharma was a market explicitly called out. With all this uncertainty, Smiths provided little comfort for investors and refrained from offering an outlook for FY''21. To add to that, management was reluctant...
Smiths performance in 2H20 compared favourably with that seen across the sector, with sales limited to a 4% decline and an underlying margin of 15%. Cash conversion was also strong and led Smiths to follow other industrials in reinstating its dividend. However, weak outlooks for John Crane and Detection could see FY21 growth underperform. We, therefore, see the stock’s valuation discount as appropriate. HOLD, TP 1500p.
Current trading resilient For the 10 months to May, revenues increased 6% (+8% in H1) of which underlying revenues increased 2% (+1% in the 4 months to May) highlighting a resilient performance through Covid-19 disruptions. This was aided by growth in John Crane and delivery of orders in Detection, while Medical saw growth driven by increased critical care demand. All of its 75 plants are open, but there will inevitably be some higher operational costs and FY20 guidance remains withdrawn but the progress y-t-d is in-line with our published forecasts. The Group remains in a strong financial position (cash conversion driving cash to £300m from £250m and the undrawn RCF of £640m with average debt maturity of over 4yrs giving a near £1bn of financial headroom). Further savings support 18-20% margin target Smiths has announced a restructuring programme to support its goal of 18-20% operating margins which should bring £70m of annualised savings from FY22 (cash cost of £65m spread over FY20 and FY21). Our view and valuation Overall, we view this as a positive update, with the Group delivering growth and being proactive with costs out. There are visible improvements in some of its divisions and the separation of Smiths Medical should create value. Clearly, trading has been impacted by Covid-19 and the Medical separation is on Hold. On balance, we believe the investment case remains intact given; 1) Smiths Medical should realise value; 2) the business has traded robustly given some of its medical and infrastructure critical products; 3) John Crane will be nearly half of group profits. The shares are trading on a FY21E PE of 13.9x and EV/EBITDA of 9.4x. Next catalyst is the FY20 results due on 24 September.
Current trading positive Q1 trading was strong with revenues in the period up 11% on an underlying basis (ex discontinued Medical, M&A and FX). This was driven by; good growth in John Crane in both original equipment and aftermarket and strong growth in Detection. Flex-Tek saw organic growth in aerospace and industrial applications while Interconnect suffered from the slowdown in semiconductors. Smiths Medical posted 2% underlying growth and its ‘separation’ is on track for completion in H1 CY20. Outlook robust Management expectations for the full year remain unchanged, based on its Q1 performance and weighted towards the first half as previously communicated. This will result in a more even seasonal balance. Our forecasts suggest 7% FY20E revenue growth, ex Medical. Our view and valuation Smiths is an interesting proposition at present. On the one hand, there is visible improvement in some of its divisions and core end markets, and on the other, it feels like the market is waiting for the Smiths Medical ‘separation’ (management suggest Q1’20). The recent FY19 results were slightly ahead of expectations and the outlook was positive, citing further progression and an H1 weighting (Jul y/e). On balance, we believe the risks are now on the upside given: 1) Smiths Medical should realise some value, 2) The business has returned to growth (John Crane – late cycle – and Detection delivering orders), 3) Our SoTP implies good upside. On our forecasts, the shares are trading on FY20E PE of c.15x, EV/EBITDA of c.10x, and a dividend yield of c.3%.
Smiths has returned to growth in FY18 despite ongoing weakness in Medical, but our 3% organic growth forecasts for FY19 and FY20 are below management's target and not enough, in our view, to return Smiths to a sector premium. We value Medical at £2.8bn, which could unlock 20% upside in Smiths ex-Medical, but a deal is uncertain. With our estimates in line with consensus and little valuation upside, we initiate coverage with a HOLD and 1700p TP.
Smiths Group reminds me of a guest of Damocles feasting on a lavish meal (cheap money) unaware of the gleaming sword (no margin of error) hanging above his head tied to the ceiling by a single hair from a horse's tail. For those who still care about fundamentals and the importance of a strong balance sheet, we would like to remind them that revenues and profits have been in decline since 2013 and only the generosity of debt markets has allowed the management to pretend that the current strategy is viable. Our best case scenario is that EPS will fall by 30% to 48.5 over the next three years. An interest rate shock will be more devastating to the bottom line as company scrambles to sell assets.
We believe the new management is taking increasing risks with the balance sheet to counter years of underinvestment. The Detection business, which has been losing market share for years, faced a sharp fall in revenues. Morpho fills a technology gap but we doubt there was much competition for this asset because our analysis shows that Morpho has also been losing market share. While the music is playing (money is cheap), we fear the management will continue to dance as other divisions also need to buy profits. Once the music stops, the management will be forced to divest or turn to equity markets. We believe the stock will be derated to 12x FY16, a discount of 20% to UK engineering sector, as balance sheet risks grow.
The new management would like us to believe that investors can have everything – above market growth, long-term value generation and rising cash and dividend – without any meaningful increase in investment or any impact on the balance sheet. To us, with John Crane’s profits collapsing, this effectively means that the focus is now entirely on somehow paying the dividend. However, the new FD should know from his experience at Vesuvius; if you focus entirely on dividend (even special ones) you end up with a company with zero or negative growth prospects. Today, the new management had the opportunity to identify investment opportunities and then set a sustainable dividend. Instead, what we got was more buzzwords like customer intimacy and operational intensity. Sadly, for investors, this means two trajectories for the share price: underperformance (if the company can refinance its debt at benign interest rates) or severe underperformance. In the short term, we expect the share price to settle at 5% yield, around 800p.
After years of under-performance, the new management team will have the opportunity to set out a new strategic direction tomorrow. The previous management was allowed to under-invest and muddle along thanks to high oil prices and cheap debt and leave the new management with a weak balance sheet. A quick reminder that the EPS growth in the past five years was a measly 0.6% p.a. in perhaps the most accommodating fiscal and monetary environment in which any company would wish to operate. The question is, how long can the current management ignore the long-term pressure on margins and carry on paying an unsustainable dividend? Tomorrow, we expect more “non-recurring” restructuring charges as the management tries to hang on to headline margins.
While we acknowledge the positive impact of reduced pension costs, the increased free cash flow of £36m per annum merely means that total free cash flow is now more likely to cover an unchanged dividend in 2017 and 2018. However, it will not be enough to “underpin the Group's ability to invest in attractive opportunities and to continue to grow dividends in line with the long term growth in underlying earnings.” A quick reminder that the EPS growth in the past five years was a measly 0.6% p.a. in perhaps the most accommodating fiscal and monetary environment that any company would wish to operate in. With John Crane's bubble burst and global capex in a deflationary spiral, our forecasts suggest that in order to maintain the dividend there will not be much free cash left to invest in growth over the next 2-3 years. We suspect that “resilient Q1 performance” and “expectations for FY broadly unchanged” merely implies that the new CEO and FD need more time to assess the structural issues and set their own expectations. We have cut our 2016 EPS forecasts by 7% to 71.5p, reflecting further downgrades in John Crane and Medical. We cut our Target Price to 850p (from 880p).
Group revenue declined by 4% compared to the same quarter last year. While John Crane was impacted by tough oil and gas end markets, there was good profitability growth in Detection and in line performance at Smiths Medical, Interconnect and Flex-Tek. Group operating margin was broadly in line with the same period last year. At this stage, we expect some downgrades given the current consensus is for unchanged sales for the full year. We remain in the dark on what the management expectations are.
In his last results as CEO, Philip Bowman has beaten expectations and, more importantly, left the impression that he is leaving with Detection in much better shape. The Group reported underlying revenue decline of 2% to £2.9bn for the year ending July 2015. Headline operating margin increased by 50bps to 17.6% while headline EPS grew by 5% to 86.1p. However, the £5m increase in operating profit was driven largely by £30m increase in Detection, which was hit by £30m one-off last year. We would urge investors to ignore the headlines, a closer at details shows the group in decline. The new CEO has his work cut out and will need to temper expectations in his first report.
