Smiths Group Plc (LON: SMIN): Well-positioned to deliver consistent performance in the long run.

Smiths Group Plc is an FTSE-100 listed multinational technology company engaged in manufacturing and selling of control systems and instrumentation for industrial applications to customers based in over 200 countries and territories around the world. The Company has operations in around 50 countries through four core divisions – John Crane, Smiths Detection, Flex-Tek and Smiths Interconnect. The Group serves its products & services in four primary markets – Security & Defence, General Industry, Space & Aerospace and Energy.

On 26 March 2021, the Company will announce the FY21 interim results.

Growth Prospects and Risk Assessment

The Company has a positive belief in achieving long-term growth by bringing rapid innovation in electronics, software, and services. SMIN would invest in opportunities to achieve long term value for its shareholders. It has placed a strategic restructuring program to deliver a cost-saving of £30 million in 2021 and £70 million in 2022. Smiths Detection and Flex-Tek had shown resilient business performance during Q1 FY21 driven by the delivery of original equipment orders and decent industrial sales.

However, the performance can be substantially impacted by the principal risk of cybersecurity, economy and geopolitics, liquidity, product quality, market risk, ethical breach, contractual obligations, and integrated supply chain. The Group may be unable to maintain technological differentiation and may face disruptive innovation by a competitor. SMIN has an overall risk of Covid-19 uncertainties which may cause a significant delay in product development. 

Industry Outlook Dynamics

With reference to the latest report from Markets & Markets, the market size of the overall industrial services stood at USD 33.60 billion in 2020. The industry is forecasted to grow at a CAGR of 5.6% for the period from 2020 to 2025 and will reach USD 44.10 billion by 2025. The key growth drivers are rising need for operational excellence and increasing equipment complexity. The Covid-19 pandemic had adversely impacted the industry, which has resulted in widespread supply chain disruptions.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Smiths Group Plc.

A Glimpse of Business Segments (FY20)

(Source: Company Website, chart created by Kalkine Group)

Q1 FY21 Trading Update (for the three months ended 31 October 2020, as on 16 November 2020)

• In Q1 FY21, the Company delivered a good trading performance, with a high proportion of aftermarket revenues.
• For the three months ended 31 October, the revenue from continuing operations decreased by 2% YoY on an underlying basis, with an increase in Smiths Medical revenue of 4% YoY (on an underlying basis).
• The Company saw further growth in Vital Care and Infusion Systems.
• The industrials business performance was good, while John Crane performance remained challenging due to tough market conditions in the Energy sector.
• Led by the delivery of original equipment orders, the performance of Smiths Detection remained strong.
• The flex-tek reported strong industrial sales, with decent momentum in Interconnect.
• It witnessed strong cash generation, with cash balances of £413 million as of 31 October 2020.
• Smiths Group continues to make progress with the strategic restructuring programme and is expected to deliver savings of around £30 million in FY21 and £70 million in FY22.
• On 27 October 2020, the Company’s Pension Scheme has secured a further £146.5 million bulk annuity buy-in agreement with Canada Life and demonstrating further progress in the de-risking of SMIN's pension liabilities. This scheme will be insured the benefits of approximately 1,000 pensioners.

Financial and Operational Highlights (for the year ended 31 July 2020 (FY20), as on 24 September 2020)

(Source: Company Website)

• Despite the H2 FY20 performance impacted by COVID-19, the Company delivered robust top-line performance.
• During the COVID-19 pandemic, Smith has maintained a strong business continuity and exemplary customer service, with temporarily higher costs and further contract wins.
• The Company witnessed a strong balance sheet, with cash of approximately £390 million, undrawn RCF of around £610 million and total liquidity headroom of £1 billion.
• SMIN has a resilient business model, with a strong operating cash conversion.
• Reflecting the Company’s strong performance and financial position, the Board has proposed a total dividend per share of 35 pence, reflecting a delayed interim dividend per share of 11 pence and a proposed final dividend per share of 24 pence.
• In FY20, ROCE (Return on Capital Employed) of 11.8% was impacted by lower profitability including the impact of restructuring and recent acquisitions.
• During FY20, aftermarket revenues delivered a stable performance on a year-on-year and represented 49% of total revenue.
• On 31 July 2020, the net debt decreased by £56 million to £1,141 million as compared with the previous year.
• Further, the Company would invest in opportunities that will create long-term value.

Financial Ratios (FY20)

Share Price Performance Analysis

On 15 February 2021, at the time of writing (before the market close, at 8:30 AM GMT), Smiths Group Plc shares were trading at GBX 1,498.11, up by 0.07% against the previous day closing price. Stock 52-week High was GBX 1,772.50, and Low was GBX 790.00, respectively.

From the technical standpoint, 200-day SMA (1,425.50) and 200-day EMA (1461.60) indicators are supporting the upside potential.

In the last five years, Smiths Group Plc’s stock price has delivered a positive return of ~59.64% return as compared to ~14.18% return of FTSE 100 Index and a ~58.57% return of FTSE All-Share General Industrials index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

The Company’s stock has delivered a positive return of around 4.22% and 18.43%, respectively, in the last six months and nine months.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

Based on the Q1 FY21 performance, the Company is confident of meeting market expectations for FY21. During the first quarter of 2021, the Company saw good performance in industrial business and strong growth in Vital Care and Infusion Systems. Moreover, the Smiths Group expects to deliver £70 million of cost benefits by FY22. However, the Company did not provide any new financial guidance due to the uncertain depth and duration of the COVID-19 pandemic. SMIN has a resilient business model, with strong operating cash conversion capabilities. The demand for Smiths Medical products has got a boost from increasing healthcare spending in developing markets, ageing populations with increasing personalised healthcare and patient expectation/quality of life. Meanwhile, SMIN is a world-leading technology Company which has consistently outperformed its chosen markets and offers a robust financial framework. Therefore, the Company is well placed to deliver a good return in the long-term.

Considering the strong financial fundamentals, growth in Infusion Systems and Vital Care, robust performance in FY20, strong liquidity position, sustainable business model, healthier customer relationships, decent profitability margins, viable momentum continued in Smiths Interconnect, progressing well in the strategic restructuring programme, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Smiths Group at the current price of GBX 1,498.11 (as on 15 February 2021, before the market close at 8:30 AM GMT), with lower-double digit upside potential based on 23.98x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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