Smiths Group Plc (LON: SMIN)

Smiths Group PLC (LON: SMIN) is an FTSE 100 listed United Kingdom-based multinational technology company. The Company provides various applications, 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 December 1950. The Group serves its products and solutions in five divisions: Smiths Detection, John Crane, Flex-Tek, Smiths Medical and Smiths Interconnect.

On 28 September 2021, SMIN would declare its FY2021 results.

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by SMIN from FY2017 to FY2020. The last dividend of FY2021, GBX 11.70 per share, was paid on 14 May 2021 (interim dividend). It had an ex-dividend date of 8 April 2021. The next dividend of FY2021 would be paid on 12 November 2021 with an ex-dividend date of 21 October 2021. The current dividend yield of SMIN at about 2.20% remains above the UK 10-year bond yield at about 0.5710%.

Growth Prospects

• Leading market position and technology: The Company achieved a resilient top line in H1 FY2021, driven by its leading market position and technology, which provides confidence for the future. Despite challenging market conditions, SMIN had good growth in chemical processing and strong growth in construction.
• High-performance energy-efficient products: The Company’s high-performance products are also energy efficient. It leads to solid demand from semiconductor tests, defence and space. The Company gets substantial orders from space exploration.
• Good profit conversion: SMIN has a solid profit conversion, which mitigates the impact on profit. Also, its solid cost control measures mitigate its lower volumes.
• Strategic restructuring programme: The Company had earlier initiated a strategic restructuring programme, which could help in consistent performance and long-term growth. The programme is expected to deliver £70 million annualised benefit from FY2022.

Key Risks 

• Smiths medical deal failure: There could be a failure in the Smiths Medical deal despite discussions being in the advanced stage. It could lead to the management realigning its strategy.
• Integration failure of acquisition: SMIN may fail to integrate the acquisition of Royal Metal Products, which could lead to an impact on its margins.
• Disruptive innovations: Any disruptive innovation by a competitor or a new entrant could take away customers and market share from SMIN, affecting its margins.
• New CEO: The Company, in May 2021, appointed Paul Keel as its new CEO. It could bring uncertainty to the Company’s strategy and operations.

Now we will analyse some key fundamental and shareholders statistics of Smiths Group Plc.

Recent Development 

Takeover approach by TA Associates: On 11 July 2021, the Company announced that US private equity firm TA Associates had offered a USD 2.78 billion takeover deal for SMIN’s medical division. The talks regarding the deal were at an advanced stage.

Financial and Operational Highlight (for six months ended 31 January 2021, as of 26 March 2021) 

(Source: LSE Website)

• Driven by strong aftermarket revenues and a market-leading position, SMIN in H1 FY2021 achieved a solid performance overcoming market disruption.
• However, the market disruption led to revenue in H1 FY2021 falling 7% YoY.
• The decline in revenue resulted in profit after tax down 4% YoY and basic EPS falling 9% YoY in H1 FY2021.
• On a positive note, SMIN had a sound profit conversion and cash generation. Its cash conversion of 129% in H1 FY2021 led to free cash flow surging 71% YoY in H1 FY2021.
• The Company’s Flex-Tek division acquired Royal Metal in H1 FY2021, strengthening its portfolio further.
• In Q4 FY2021, there could be a separation of Smiths Medical. The talks regarding a potential deal are going on.

Financial Ratios (H1 FY2021)

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 2 August 2021, at 7:40 AM GMT, SMIN’s shares were trading at GBX 1,566.50, up by 0.71% against the previous day closing price. Stock 52-week High and Low were GBX 1,669.50 and GBX 1,287.50, respectively.

On a daily chart, SMIN’s price is sustaining above 200-day EMA of about GBX 1,541.30 and 200-day SMA of about GBX 1,534.30, indicating the possibility of an upward movement. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last five years, SMIN’s stock has delivered a positive return of ~24.04%. Also, it has outperformed the FTSE 100 index with a return of about 5.06%.

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

Business Outlook Scenario

SMIN delivered a robust performance so far in FY2021, despite market disruption. With its solid profit conversion and strong cash generation, it has increased its free cash flow 71% YoY in H1 FY2021. The management anticipates meeting expectations for FY2021 if the market makes a continuous recovery, which is expected. The Company could benefit from its leading market position and technology, high-performance energy-efficient products, good profit conversion and strategic restructuring programme for the rest of FY2021 and beyond. The impending separation of Smiths Medical by FY2021 would simplify the Company’s operations, and as per the management, could maximise value for all stakeholders.

Considering the Company’s solid growth opportunity, its strong cash generation, solid demand from the customers, the better profitability and liquidity of the business than the industry, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Smiths Group Plc at the current price of GBX 1,566.50 (as of 2 August 2021 at 7:40 AM GMT), with lower-double digit upside potential based on 17.89x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

 *Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. Resistance level 2 is at 52 week high and if Smiths Group Plc attains momentum or breach it, then target price as per valuation table could be seen in the near term as per technical chart analysis.

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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