Investment Highlights
 

1. Smiths Group Plc (LON: SMIN) develops, manufactures and sells control systems and instrumentation for industrial applications to customers based in over 200 countries and territories around the world.

2. The group is enabling industry, improving healthcare, enhancing security, advancing connectivity and supporting new homes.

3. SMIN has a strong global presence and operating in more than 50 countries with an employee base of around 23,000 professionals.

4. The Group is well-positioned in the long run to deliver organic growth coupled with accretive growth opportunities through its disciplined M&A approach.

5. The portfolio strength and competitiveness of the Group can be understood by the fact that in 2019, over 90 per cent of the revenue was generated from the top three positions in the attractive market.

6. The group has collaborated with the prominent global medical technology organisations to tackle the coronavirus pandemic and is a member of  VentilatorChallengeUK Consortium.

7. Delivered strong revenue growth with a decent operational performance for the current period.

8. The company works closely with its suppliers to offer quality products and an end to end services to its customers.

9. The group is confident towards its business model and management team to tackle the uncertain times created due to coronavirus pandemic.

10. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Smiths Group PLC (LON: SMIN) is well-positioned to generate consistent performance in the long run with its leading position in attractive markets. 

Smiths Group PLC is a FTSE 100 multinational technology company. The Company provides various application, control systems and instruments for advanced technologies. It was founded in 1851 as a jewellery shop (Samuel Smiths), which later changed its name to Smiths Group. Currently, it is headquartered in London, United Kingdom, with operations in over 50 countries. It employs around 23,000 people worldwide. The Company was admitted to the London Stock Exchange on 20^th December 1950. The Group serves its products and solutions in the four key major markets – Security & Defence, General Industry, Energy and Space & Aerospace and. In terms of percentage of 2019 revenue, the above mentioned four markets generated 38 per cent, 33 per cent, 23 per cent and 6 per cent, respectively.


(Source: Company Website)

Segments at a Glance

In terms of the business unit, the Company’s operations are divided into the following four divisions, while the business operations of ‘Smiths Medical’ has recently been discontinued:
 

John Crane:

1. Provides solutions for global process industries and energy markets.

2. Contributed 38 per cent of the Group revenue and 46 per cent of the continuing Group operating profit in 2019.
 

Smiths Detection:

1. Provides solutions for detection and authentication.

2. Contributed 32 per cent of the Group revenue and 27 per cent of the continuing Group operating profit in 2019.
 

Flex-Tek:

1. Provides components and solutions to move and heat gases and fluids.

2. Contributed 17 per cent of the Group revenue and 17 per cent of the continuing Group operating profit in 2019.
 

Smiths Interconnect:

1. Provides secured connectivity in applications

2. Contributed 13 per cent of the Group revenue and 10 per cent of the continuing Group operating profit in 2019.
 

Geographically, it distinguishes its revenue into four regions, namely Americas, Europe, Asia Pacific and Rest of the World which contributed revenue of 50 per cent, 22 per cent, 16 per cent and 12 per cent, respectively in the financial years 2019.

Key Statistics



Key Performance Indicators to Measure Operational Performance
 

1. Aftermarket revenue reached 49 per cent to total sales as against 48 per cent in 2018.

2. Recordable Incident Rate per 100 colleagues stood at 0.41 in 2019, which reflect its continued priority to health and safety.

3. Effective innovation rate can be judged through the Volatile index, which stood at 13 per cent, reflecting the percentage of revenue (against total revenue) generated from the products launched in the past three years.
 

(Source: Presentation, Company Website)

Significant Developments of 2020

1. 9^th April 2020:The Company affirmed its collaboration with key ventilator manufacturers through its Smiths Interconnect business to fight the Covid-19 pandemic.

2. 30th March 2020:The Company received a contract for 10,000 ventilators from the UK government.

3. 8^th January 2020:Karin Hoeing joined the Board of SMIN as an independent non-executive Director. He is also supposed to be the member of the Remuneration Committee, with effect from 2^nd April 2020.
 

Top Shareholders

 

Financial Highlights for the period H1 FY2020: Strong Balance Sheet with Excellent Cash Conversion (31^st January 2020)


(Source: Interim Report, Company Website)
 

1. In the first half of the financial year 2020, driven by a decent performance from Flex-Tek, Smiths Detection and John Crane businesses, the revenue increased by 8 per cent (continuing operations) to GBP 1,240 million as against GBP 1,143 million in H1 FY2019.

2. The group’s headline operating profit from continuing operations increased by 6 per cent to GBP 186 million in H1 FY2020 from GBP 175 million in H1 FY2019. The statutory operating profit surged by 14 per cent from GBP 127 million in H1 FY2019 to GBP 145 million in H1 FY2020.

3. The headline PBT (profit before tax from continuing operations) increased by 10 per cent to GBP 160 million in H1 FY2020 from GBP 146 million in the first half of the financial year 2019, driven by strong growth of revenue and operating profit.

4. The headline profit for the period increased by 17 per cent to GBP 187 million in H1 FY2020 from GBP 160 million in H1 FY2019. The statutory profit for the period surged by 20 per cent from GBP 121 million in H1 FY2019 to GBP 145 million in H1 FY2020.

5. The headline basic earnings per share stood at 46.9 pence in H1 FY2020 versus 40.2 pence in H1 FY2019, reflecting an increase of 17 per cent. The statutory basic earnings per share stood at 36.3 pence in H1 FY2020 versus 30.3 pence in H1 FY2019, reflecting an increase of 20 per cent
 

Financial Ratios – Decent Profitability Margins with Increased Liquidity

 

The reported Gross margin, Pretax margin and Net margin reported was 41 per cent, 3.7 per cent and 1 per cent, respectively, for the first half of the financial year 2020. Return on equity for the first half of the Financial year 2020 stood at 0.5 per cent, which was lower than the Industry Median. On the liquidity front, Smiths Group Plc’s current ratio was higher than the industry median of 1.65x. On leverage front, the debt-equity ratio of the Smiths Group Plc’s was 0.67x, which was higher as compared to the industry median of 0.40x.

Share Price Performance


Daily Chart as on 4^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 4, 2020, at the time of writing (before the market close, at 9:24 AM GMT), Smiths Group Plc shares were trading at GBX 1,194.30, up by 0.23 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,778.50/GBX 790.00.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the near term.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Smiths Plc with its peers, Price/Earnings multiple has been used. The peers are Spirax-Sarco Engineering Plc (NTM Price/Earnings was 33.97), Spectris Plc (NTM Price/Earnings was 19.90), IMI Plc (NTM Price/Earnings was 12.72), Melrose Industries Plc (NTM Price/Earnings was 12.48) and Ricardo Plc (NTM Price/Earnings was 8.16). The Average of Price/Earnings (NTM) of the company’s peers was 17.44x (approx.)

Method 2: Price/Cash Flow (NTM) Approach



To compare Smiths Group Plc with its peers, Price/Cash Flow multiple has been used. The peers are Morgan Advanced Materials Plc (NTM Price/Cash Flow was 19.10), Weir Group Plc (NTM Price/Cash Flow was 10.28), IMI Plc (NTM Price/Cash Flow was 10.19), Vesuvius Plc (NTM Price/Cash Flow was 8.96) and Melrose Industries Plc (NTM Price/Cash Flow was 8.76). The Average of Price/Cash Flow (NTM) of the company’s peers was 11.46x (approx.).

Dividend Yield

(Source: Refinitiv, Thomson Reuters)

Smiths Group Plc has a dividend yield of 2.67 per cent, which is higher than the industry dividend yield of 2.21 per cent and the sector dividend yield of 1.67 per cent. This needs to be considered in view of the recent correction in the stock price.

Smiths Plc Vs FTSE - 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Smiths Group Plc share price has delivered 5.07 per cent returns as compared to negative 17.51 per cent returns of FTSE - 100 index, which shows that the stock has outperformed the index during the last year.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)
 
Smiths Group Plc has generated a total return of 22.05 per cent in the last five years versus the total return of FTSE All share of 2.13 per cent for five years period.
 
Industry Outlook

The megatrends that would drive the industry and demand of Smiths’ product, in the long run, include Ageing populations led healthcare demand and Increasing Digitalisation and connectivity. Moreover, the usage of artificial intelligence (AI) is growing rapidly across industries. Furthermore, the rising energy demand (around 1.2 per cent growth per annum) and environmental regulations continuously changing the energy landscape. Also, the growing urbanization and need for transport and infrastructure require interconnectivity solutions.

Smiths Group has launched a service & subscription model and providing innovative electronic medical record systems to capture the digitalisation and connectivity market. Further for AI, its Smiths Detection CORSYS™ platform assist in making informed decisions while its other platform, John Crane Sense^TM leverages machine learning algorithms. For energy efficiency, the Group is developing several new products for greener future such as John Crane’s dry gas seals reduces methane gas emission.

Growth Prospects and Risk Assessment

Over the medium-term, 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. 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 tariffs; 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.

Business Outlook Scenario

Smiths Group is a world-leading technology company which has consistently outperformed its chosen markets and offers a robust financial framework. In the third quarter of the fiscal year 2020, the company has reported decent growth as compared to the same period last year. In all of its businesses except Smiths Interconnect, sales and adjusted operating profit was ahead of the same period last year, which reflects good operational performance, strong performance in manufacturing and supply chain and good cost discipline.

The demand for products offered by Smiths Medical has got a boost from increasing healthcare spending in developing markets and ageing populations with increasing personalised healthcare and patient expectation/quality of life. Strong demand observed from the medical industry and growth market coupled with high return segments like Smiths Medical and John Crane. The group’s demand and supply are impacted due to outbreak of Covid-19, and it has taken steps to preserve cash and reduce the cost to reduce the impact on financial stability.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 1,155.50 (as on 4th May 2020, before the market close at 8:05 AM GMT+1), with lower double-digit upside potential based on 17.44x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 11.46x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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