BofA ML double upgrades Smiths Group to ‘buy’

ML noted that Smiths has more than 60% defensive and high aftermarket content assets.

"Smiths’ portfolio exposure is biased towards defensive, regulated and late cycle markets (e.g. safety & security, energy) that should appeal to investors given macro concerns," it said. "Aftermarket (AM) is circa 38% of mix and concentrated in Detection & John Crane where demand is elevated on post-pandemic aviation security upgrades & energy security/transition."

BofA ML also argued that balance sheet strength provides substantial portfolio change optionality, both organic and inorganic.

"Management have optionality to invest organically e.g. in R&D to drive product vitality and growth, or to add scale or technology through M&A, which we think Interconnect in particular would benefit from given its sub-scale positioning vs peers," the bank said.

"We see optionality to unlock significant value from broader portfolio transformation, such as we have seen elsewhere in the UK industrial space (e.g. Spectris & IMI)."

It also pointed out that the stock trades at a discount of around 25% to sector one-year forward EV/EBITA versus a slight premium historically. This discounts headwinds from construction in Flex-Tek, it said.

The bank said it was lifting its operating profit estimates by 5% to 22% on a stronger outlook for Detection & John Crane, particularly in the aftermarket segments.

At 1140 BST, the shares were up 2.4% at 1,696p.