Smiths saved by sterling boost, 'well positioned' for return to growth

Smiths Group reported a small decline in full year underlying revenue but 11% growth on a reported basis thanks to the weak pound and said strategic progress made in the year set it up to return to growth next year.

On revenue of £3.3bn in the year to 31 July, underlying headline operating profit increased 3% or by 16% on a reported basis as operating profit margins improved in all divisions was limited by increased investment, though this represented a slowdown from the 18% growth in the first half of the year.

Chief executive Andy Reynolds Smith said investment, which was increased in all divisions to represent 4.6% of group sales, was an important element of the progress in executing the strategy so that the group was "well positioned" to return to growth in the new financial year.

"We are well underway in repositioning the business through organic and inorganic investment with approximately 75% of the group now well positioned in attractive markets.

"The disposal of four non-core businesses and the acquisition of Morpho Detection has supported the significant upgrading of the portfolio as we increasingly focus on scalable, technology-differentiated leadership positions in our chosen markets."

Looking back the year just completed by division, energy sector engineer John Crane saw underlying revenue fall 4% due to its main focus being on the oil & gas market.

Underlying revenues at Smith Medicals fell 3% due to a delay in some new product launches as management try and refresh and expand the product portfolio.

Smiths Detection revenues rose 4% and those at Smiths Interconnect increased 1%, though were the only division to see a fall in reported growth.

Flex-Tek's underlying revenues grew 3% and it had the strongest growth in reported revenue of 19% due to its exposure to US construction.

Group pre-tax profits grew 17% to £528m and headline basic earnings per share increased 15% to 97.6p per share.

EPS was very slightly ahead of the 97.0p consensus forecast, with revenues in line £3.3bn.

A proposed final dividend of 29.7p per share, up by 1.25p on last year's, meant the full year dividend was upped 3%.

Looking forward, as in previous years, Reynolds Smith expects the 2018 trading performance to be weighted towards the second half.

"Growth in John Crane's non-oil & gas business, as well as an increase in aftermarket is expected to more than offset the challenging market conditions in oil & gas.

"We expect the introduction of new products during the year to support a gradual improvement in Smiths Medical. In Smiths Detection we anticipate a strong second half driven by air transportation, which should generate good growth for the year as a whole. In Smiths Interconnect, our focus on fewer, higher-growth end markets is anticipated to support further good progress in this division. Flex-Tek is expected to deliver continued steady growth."

SMIN shares were down more than 5% on Friday to 1,517.67p.

Credit Swiss said it was a "solid set" results, feeling EBITA was 3% ahead of consensus, with outlook for organic growth "clearly improving while margin progression is to be held back somewhat by investment for growth and restructuring costs".

But the Swiss bank reduce its EPS estimates by circa 2% for 2018-19, mainly driven by FX, but kept its target price unchanged thanks to better cash generation.

Analysts see the stable margin outlook for the new financial year as "somewhat conservative" as in the latest year the company improved profitability by 70 basis points despite a tough end-markets backdrop and 36bps margin headwind from the R&D increase.

"We continue to see an attractive investment case in Smiths based on 1) improving growth profile across divisions, 2) continuing portfolio adjustment through disposals and 3) Morpho integration synergies and potential further acquisitions."

Analysts at RBC Capital Markets said the second half of the year beat expectations thanks to stronger margins, though underlying revenue growth implied a 2.2% decline in the second half after a flat first.

"We see the results as in-line – slightly disappointing on underlying growth but continued improvements in profitability. Higher central costs may see consensus EBITA reduce a little (~2%), offset by a slightly better tax rate outcome than previously flagged," RBC said.

"We continue to believe that the group can return to underlying positive growth in FY’2018, and the management commentary is supportive of that, albeit we may have to wait until the second half to see it."