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Smiths shares slip despite better than expected update

Discussion in 'Market News' started by Lily, Mar 17, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Company’s medical business helps offset falls at oil and gas division

    Engineering group Smiths has seen its shares slip back despite a better than expected performance in its first half.

    The company said operating profit fell by 6% to £217m as a good performance from its medical business offset falls at its John Crane business, which supplies the flagging oil and gas sector where businesses are cutting back investment.

    While John Crane has suffered (as expected) from its oil and gas exposure, Smiths has enjoyed the benefit of cost reduction in its two least-liked businesses – Detection and Interconnect – to generate interim results above our low-end estimates.

    Smiths’ interim results were very solid in tough markets. They were much in line with our forecasts – and we believe slightly above consensus – at the group level. John Crane margins weakened slightly more than we had allowed for (though still 19.9%), but this was more than offset by strong performances at Medical and Detection. Strong cash conversion (101%), progress on pensions and 2% increase in dividend should dispel any lingering concerns on the financing front.

    Not much detail on management’s next steps, though a focus on emerging market/China growth as expected, and on increasing (and better targeted) research and development, funded by efficiency gains and stronger execution. Detection also announced a significant order for US federal government buildings. Company says that it still expects the year to be second half weighted, which is encouraging after a solid first half – and says outlook for the year is unchanged. All in all, impressive in the circumstances. We continue to think the shares are good value at 13 times July 2017 estimates. Retain buy.

    The first half of 2016 was primarily a test of the quality of John Crane a test we would say has been passed, although not with flying colours – an 11% organic decline in sales and 24% fall in earnings before interest and tax. The group’s outlook for 2016 is maintained. We believe that largely underpins our 2016 forecast earnings before interest and tax and combined with favourable foreign exchange translation may imply some upside to Bloomberg consensus. It also serves a reminder that Smiths should not be underestimated, in our view.

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