Smiths Group shares fall on medical division disappointment

Smiths Group shares were in the red on Wednesday morning, despite a relatively upbeat trading update, as investors noticed an effective profit warning for its medical division buried in the RNS release.

The FTSE 100 company said that reflected the anticipated acceleration of its growth rate in the second half, with good performances from John Crane, Smiths Detection, Smiths Interconnect and Flex-Tek.

It said the group, with the exception of Smiths Medical, was expected to deliver a full year performance in line with expectations.

“In advance of the new EU Medical Device Regulation in 2020, one of Smiths Medical's European Notified Body service providers has been decertified for some products,” the Smiths board explained.

“This has led to the temporary suspension of some of Smiths Medical's products in Europe.”

As a result of that, and the termination of two contracts in the US, the division was now expected to deliver a 2% decline in revenue for the full year, with margins similar to the first half.

Excluding the impact of those one-off disruptions, the group said the division was delivering “good” underlying growth, underpinned by the growing contribution of new products launched in the year.

Accendo Markets research analyst Artjom Hatsaturjants said shareholders had a right to be downbeat, as the decreased full-year guidance for Smiths Medical came on the back of several products being suspended ahead of those new EU regulations, as well as the termination of the two US contracts.

“Smiths Medical represented 29.1% of group revenues and 33.2% of group operating profits at the half-year point, suggesting that the lower divisional guidance is bound to do damage to the overall group’s full-year profit and loss statement.”

Smiths Group said it had continued to make further progress on the high grading of its portfolio, focusing it on scalable leading positions in attractive growth markets.

In May, John Crane completed the sale of its Bearings business to Miba AG for an enterprise value of $35m and in June, it completed the acquisition of highly-engineered filtration solutions provider Seebach, for an enterprise value of €60m.

As announced in May, the group remained in discussions about a potential combination of its medical division with ICU Medical, though the board reiterated there could be no certainty that a transaction would be concluded.

“With the group now back in growth, we expect the 2019 financial year to be another year of progress,” the board added.

“We remain confident that over the medium term we will achieve sustainable organic revenue growth above our chosen markets.

“In parallel with active portfolio management, we will deliver superior long-term sustainable value.”

Smiths' annual results announcement for the year ending 31 July was scheduled to be released on 21 September.

“Today’s market reaction highlights the vagaries of the stock market and how even a single underperforming division can sour investor outlook for the otherwise healthy business,” Artjom Hatsaturjants added.