Exane downgrades Smiths, says outlook for two largest assets has worsened

The bank said new management inherits two legacy issues.

Firstly, it noted that organic sales growth has lagged the sector for years and said growth for both the medical and John Crane businesses will be tough.

Exane said the former faces a rising competitive threat from consolidating competitors, while the latter should see sharper volume and price declines than currently modelled by consensus.

“We conclude that the outlook for Smiths’ two largest, most cash generative assets, has worsened.”

Secondly, it said the situation regarding legacy liabilities has improved but these issues are not fully resolved. Exane said its analysis suggests the cash cost of a final solution may still be too high, limiting the options for a break-up scenario.

In addition, Exane pointed out that the shares are currently trading close to free cash flow yield lows and at dividend yield highs.

“Something has to give; we think the dividend will have to be cut. Under our dividend assumption, the shares actually yield less than the rest of the sector,” it said.

At 0920 BST, Smiths shares were down 1.1% at 1,019p.