Overview
Smiths Group PLC (SMIN) is a British technology company headquartered in London, United Kingdom. In 1851, the company, formerly known as Smiths Industries, was established by Samuel Smith as a jewellery shop in south London. In 2000, the name of the business was changed to Smiths Group. The group develops, manufactures and sells control systems and instrumentation for industrial applications to customers based in over 200 countries and territories around the world; enabling industry, improving healthcare, enhancing security, advancing connectivity and supporting new homes. The group employs 22,000 personnel across 50 different countries. The company is listed on the London Stock Exchange and was made a constituent of the FTSE 100 index for the first time in 1995.

Management
Sir George Buckley is the current Chairman of the Board, he joined the board in August 2013 as Deputy Chairman and was subsequently appointed as the Chairman in November 2013. Andy Reynolds Smith holds the responsibilities of the Chief Executive, he was named in September 2015 and brings to table an in-depth knowledge of the industry. John Shipsey was appointed as the Chief Financial Officer in January 2018.

Divisions
The company operates in five divisions: Smiths Detection, Smiths Interconnect, Flex-Tek , Smiths Medical and John Crane. John Crane provides mission-critical solutions for global energy and process industries; Smiths Medical provides high-quality, cost-effective, specialty medical devices and consumables in select segments that are vital to patient care globally; Smiths Detection is a global leader in the detection and identification of security threats and contraband; Smiths Interconnect offers solutions for high-speed, secure connectivity in demanding applications; and Flex-Tek offers innovative components to heat and move fluids and gases.

End Markets
The company end users are differentiated into five markets: Oil & Gas, Space & Aerospace, Security & Defence, Medical Technology and General Industrial. Medical Technology is one of the largest markets for the company. The demand for medical products has been increasing worldwide because of the ageing population and increased healthcare spending in developing countries. Smiths Interconnect and Flex-Tek offer products to this market. The customers in this market rely on company's products to assist them in keeping the airport, venues and ports safe, and the market is driven by growth in air travel, threats stemming from crime, geopolitical unrest and terrorism. Smiths Interconnect and Smiths Detection serve this market. General Industrial includes demand for general industrial applications. The customers are served by Flex-Trek, Smiths Interconnect and John Crane, and the growth closely tracks increases in GDP worldwide. Customers of Oil & Gas depends on mechanical seals and seal support systems supplied by John Crane. Demand from Space & Aerospace includes components that operate reliably at extremes of pressure and temperature, served by Flex-Tek and Smiths Interconnect.

Key Statistics


Key Financial Metrics (FY 2018, in £m)
 
(Source: Company Filings)

Key Financial Highlights (FY 2018, in £m)
In FY 2018, the group returned to growth on an underlying basis with the revenue increasing by 2%, or £58 million. In FY18, the company reported revenue of £3,213 million, against £3,280 million in FY 2017, was down by 2% over the year, mainly because of adverse foreign exchange translation of £126 million. Headline operating profit decreased by 8% to £544 million, vs £589 million in FY 2017. Though the headline number was down because of restructuring and pension administration costs, adverse foreign exchange translation and impact from acquisitions and disposals, the underlying value rose by 3%.  On an underlying basis, headline operating margin increased by 10bps; however, reported basis headline operating margin decreased 110bps. Statutory operating profit decreased by £180 million in FY 2018 to £494 million, due to higher base in FY 2017. On a reported basis, basic EPS declined by 7% to 90.7p, against 97.6p in FY 2017. However, the value increased by 4% on an underlying basis. Free cash flow also declined on a reported basis by 18% to £302 million. For sustainable growth, R&D at 4.6% of sales was reported, with Vitality index reaching 13% for the first time. The return on capital employed decreased by 160bps to 14.6%, from 16.2% in FY 2017, reflecting recent investments made by the company. The company aims to maintain minimum dividend cover of around 2.0x and recommended a final dividend of 30.75p per share, against 29.70p per share in FY 2017. The total dividend for the year increased by 3% to 44.55p per share, amounting to £172 million.

Financial Ratios

 (Source: Thomson Reuters)

Ratios Commentary
Though the profitability margins of the company dipped in FY 2018, they were still significantly more than the industry median. The fall in operating and net margin from the previous year reflects the decline in the company's performance on a reported basis. The liquidity position, too, declined in FY 2018 but was better than the industry median. The company is gradually moving towards the industry standard, and the decline was mainly due to a significant rise reported in FY 2017. The assets/equity had progressively been declining and is now less than the industry median. The debt/equity, too, decreased in FY 2018 and was steadily moving towards the industry median. The asset turnover was less than the industry median, indicating assets can be used more efficiently.

Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM)


To compare Smiths Group with its peers, Price/Earnings multiple has been used. The peers are Rotork PLC(NTM P/E was 21.02), Bodycote PLC (NTM P/E was 14.72),Weir Group PLC(NTM P/E was 14.27) and IMI PLC(NTM P/E WAS 13.31). The mean of Price/Earnings (NTM) of the company’s peers was 15.83x.

Method 2: Price/Cash Flow Multiple Approach (NTM)  


To compare Smiths Group with its peers, Price/Cash flow value multiple has been used. The peers are Rotork PLC(NTM P/CF was 19.77), Weir Group PLC (NTM P/CF was 11.58),IMI PLC(NTM P/CF was 10.77), Bodycote PLC(NTM P/CF was 10.68) and Vesuvius PLC(NTM P/CF was 9.78). The mean of Price/Cash flow (NTM) of the company’s peers was 12.52x.

*All forecasted figures peers have been taken from Thomson Reuters.

Share Price Commentary
 
Daily Chart as at Mar-12-19, before the market close. (Source: Thomson Reuters)
 
On 12th March 2019, at the time of writing (before market close, GMT 9:16 ^AM), SMIN shares were trading at GBX 1,427.35, down by -0.45 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,810.17/GBX 1,256.74. At the time of writing, the share was trading 21.14 per cent lower than its 52w High and 13.54 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 430,963.40; 30 days – 655,767.57and 90 days - 855,354.01. The average traded volume for 5 days was down by 34.28 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 15.2x as compared to the industry median of 14.2x. The company’s stock beta was 0.76, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £5.68 billion and a dividend yield of 3.14 per cent.
 
Risks Assessment and Growth Prospects
Over the next year, the company aims to sustain at least the growth rate that was reported in FY 2018. Over the medium-term, however, the company is expected to grow faster than the market, with long-term sustainable growth and attractive return. The growth market segment has reported excellent growth, and further growth opportunities present a unique opportunity for the company to grow. Ageing populations with increasing personalised healthcare and patient expectation/quality of life, coupled with increasing healthcare spending in developing markets, has increased the demand for products offered by Smiths Medical. A steady growth of the US housing construction market supported by expanding international market for corrugated stainless-steel tubing for residential housing has also presented an excellent opportunity for the company to grow. The threats to free trade have increased considerably in the last year and show no sign of abating. This will have an adverse impact on business performance due to the imposition of the tariff; sanctions have already affected trade with Iran and Russia. Regulatory changes and the imposition of tariffs on trade between the UK and the Eurozone poses a severe threat to the company as well.

Conclusion
Smiths Group is a world-leading technology company which has consistently outperformed its chosen markets and offers a robust financial framework. High return segments like Smiths Medical and John Crane, coupled with strong demand from the medical industry and growth market augur well for the company. Based on strong underlying fundamentals supported by healthy increase in demand for medical products and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 1,433.50 (as on 11th March 2019) with single-digit upside potential based on 15.83x NTM Price/Earnings on FY19E earnings per share and 12.52x NTM Price/Cash Flow on FY19E cash flow per share.

*The buy recommendation is valid for the current price as covered in the report (as on Mar-12-19).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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